How FICO Credit Scores Are Calculated

Because we live in a computer-driven society, it's probably not that surprising that your creditworthiness comes down to a single number. This score is created by credit reporting agencies. These agencies use the payment history from all of your loans: mortgages, car/motorcycle/boat loans, credit cards, and the like.

The three credit reporting agencies use slightly different formulas to build a credit score. The original FICO score was developed by Fair Isaac and Company. While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While the formulas vary from one agency to another, each agency uses the following to determine your credit score:

• Your Credit History - How long have you had credit?
• Payment History - Do you pay your bills on time?
• Balances on your Credit Cards - How many accounts do you have, and how much do you owe on them?
• Inquiries on Your Credit - How many times have you had your credit checked for a loan?

Each of these factors is assigned a value and a weight. Each formula produces a single number which may vary slightly by agency. Credit scores can be as low as 300 and as high as 800. Higher is better. Most home buyers these days have a score above 620.

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.

Improving your score

Unfortunately, there isn't a lot you can do to immediately improve your credit score. So called "credit repair" companies advertise quick fixes, but the FICO score is calculated from your lifetime credit history, so it's not possible to raise it significantly in the short term. You should remove any incorrect reporting from your credit report; this is the only "quick fix" for credit problems.

How do I find out my credit score?

To improve your score, you've got to obtain the credit 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 get your FICO from all three agencies, along with your credit report. Also available are information and tools that can help you improve your FICO score.

You can get a free credit report once a year from the three major agencies at 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'll be a more informed consumer and you'll be better positioned to get the most favorable mortgage.

Curious about credit scores? Call us at 6507631924.