FICO Credit Scores: What Do They Mean?

Since we live in an automated society, it should come as no surprise that your ability to repay your mortgage loan boils down to just one number. Credit reporting agencies use your history of paying loans in order to build this score.

Experian, TransUnion, and Equifax, the three major credit reporting agencies, each have a proprietary formula for building a credit score. The original FICO was developed by Fair Isaac and Company. Experian uses this model and calls its score FICO. Equifax's model, based on FICO, is called BEACON, while TransUnion, which also uses a slightly modified FICO, calls its score EMPIRICA. While these methods vary from one agency to another, all of the agencies use the following to determine your credit score:

  • Your Credit History - Have you had credit for many years, or for a short time?
  • Payment History - Have you paid more than 30 days late?
  • Credit Card Balances - How many accounts do you have, and how much do you owe?
  • Requests for Credit - How many times have you had your credit checked for a loan?

These factors are weighted differently depending on the formula being used. The result is a single number: your credit score. Credit scores range from 300 to 800. Higher is always better. Most home buyers likely find their scores above 620.

Your credit score greatly affects your monthly payment

Credit scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are probably a better credit risk, and thus may qualify for a better mortgage rate.

Can I improve my credit score?

What can you do to raise your FICO score? Unfortunately, not much. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. (Of course you must have incorrect items removed from your credit report.)

How do I find out my credit score?

To raise your credit score, you've got to get the reports that are used to build it, and of course, you need the score itself. Fair Isaac, the corporation that invented the original FICO credit score, sells credit scores on myFICO.com. It's inexpensive to quickly get your FICO from all three agencies, along with your credit report. They also provide information and online tools that help you analyze what actions might have the greatest impact on your FICO score.

You can get a free credit report once per year from the three major credit reporting agencies at AnnualCreditReport.com. These reports do not include a free credit score, but it's very inexpensive to get one at the same time.

Now that you have all the facts, you'll be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.

Want to know more about credit scores? Call us at (650) 689-5684.

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