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 boils down to just one number.
The FICO score is built by credit agencies. These agencies use the payment history of all of your loans: credit cards, mortgages, car/boat loans and the like.
The three reporting agencies use slightly different formulas to build a credit score. Fair Isaac and Cooriginally developed this score. .
While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While each of the models considers a range of data available in your credit report, each agency uses the following to determine your score:
- Credit History - How long have you had credit?
- Late Payments - Do you pay your bills on time?
- Credit Card Balances - How many credit card accounts do you hold, and how much do you owe on them?
- Inquiries on Your Credit - How many times have lenders pulled your credit for the purpose of lending you money?
These factors are weighted slightly differently depending on which formula the agency uses. The results are added up and distilled into a single number. FICO scores range from 300 to 800. Higher scores are better. Most borrowers getting a mortgage loan these days have a score above 620.
Credit scores make a huge difference in interest rates
Did you know? FICO scores are used for more than just determining whether or not you qualify for a mortgage. Lenders give lower interest rates to individuals with higher scores.
Can I improve my credit score?
Is there any way to improve your FICO score? Some companies promise quick fixes, but they can't do anything different than what you can do — for free. (Of course you can and should appeal incorrect items on your credit report.)
Getting your credit score
Before you can improve your FICO score, you have to get your score and make certain that the credit reports from each credit reporting agency are correct. Fair Isaac, the company that invented the original FICO credit score, sells FICO scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score along with reports from all three agencies. They also provide helpful 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 all three credit reporting agencies by visiting AnnualCreditReport.com. While this report does not include a free credit score, the cost to "upgrade" your report to include a credit score is very reasonable.
Armed with this information, you'll be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.
Curious about your credit score? Call us at (650) 689-5684.