How FICO Credit Scores Are Calculated

Because we live in a computer-driven world, you're probably not surprised to hear that your ability to repay virtually any loan boils down to one number. All the years you've been paying your various bills: your mortgage, car payments, and credit card bills can be analyzed, sliced, diced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

The three agencies use slightly different formulas to build a credit score. The original FICO model 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, all of the agencies use the following to build a score:

• Credit History - How many years have you had credit?
• Payment History - Do you pay your bills on time?
• Balances on your Credit Cards - How many accounts do you hold? How much do you owe on your accounts?
• Credit Inquiries - How many times have you had your credit checked for a loan?

These factors are assigned weights based on the formula being used. The results are added up and distilled into a single number. Credit scores can be as low as 300 and as high as 800. Higher scores are better. Most folks getting a mortgage loan in the current environment score 620 or above.

Not just for qualifying

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

Raising your FICO score

Is it possible to raise your credit score? So called "credit repair" companies advertise quick fixes, but the FICO score is formulated from your lifetime credit history, so you can't turn it around right away. (Of course you must remove incorrect data on your credit report.)

Know your FICO

To improve your credit score, you must have the reports that the agencies use 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. It's inexpensive to quickly get your FICO from all three agencies, along with your credit report. Also available are information and 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 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.

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

Curious about your FICO score? Give us a call at 6507631924.