How FICO Credit Scores Are Calculated

Because we live in an automated, you're probably not surprised to hear that your ability to repay your mortgage loan comes down to a single number. This score is compiled by credit reporting agencies. These agencies use the payment history of all of your loans: mortgages, car loans, credit cards, and others.

All three credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a score. The original FICO score 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 the formulas vary, the differences aren't huge; each agency uses the following factors to calculate your score:

• Your Credit History - How long have you had credit?
• Late Payments - Do you have a history of late payments?
• Your Credit Card Balances - How many accounts do you hold? How much do you owe on your accounts?
• Requests for Credit - How many times have you had your credit checked for a loan?

These factors are weighted slightly differently depending on the formula being used. Each formula produces a single number which may vary a a little from one agency to another. Credit scores range from 300 to 800. Higher is always better. Typical home buyers probably find their scores falling above 620.

Credit scores make a huge difference in your interest rate

FICO scores affect more than your ability to get a loan. They also affect your interest rate. Lenders give lower interest rates to individuals with higher scores.

Raising your credit score

What can you do about 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 can and should remove incorrect data on your credit report.)

How do I find out my credit score?

To improve your score, you must obtain the credit reports that are used to build it. Of course, you need the score as well. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. For a reasonable fee, you can get your FICO score from all three reporting agencies, along with your credit report. Also available are helpful information and online tools that help you understand how to improve your FICO score.

You can get a federally-mandated free credit report once per year from the three major agencies by visiting AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is fast and inexpensive.

Armed with this info, you will be a more informed consumer and you'll be better positioned to get the most favorable mortgage.

Curious about credit scores? Call us: 6507631924.