How FICO Credit Scores Are Calculated
Since we live in an automated world, it's not surprising that your ability to repay your mortgage loan comes down to just one number.
All the years you've been paying your various bills: your mortgage, vehicle payments, and credit card bills can be analyzed, sliced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.
All three credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a credit score. Fair Isaac and Cooriginally developed this score. .
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, the differences aren't huge; each agency uses the following factors to calculate a score:
- Credit History - How many years have you had credit?
- History of Payments - Do you have a history of late payments?
- Your Credit Card Balances - How many credit card accounts do you have, and how much do you owe?
- 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. 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 home buyers likely find their FICO scores above 620.
FICO makes a big 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.
Raising your credit score
What can you do to raise your FICO score? Unfortunately, not much. Despite what you hear from "credit repair" companies, the score is calculated from your lifelong credit history, so you can't turn it around right away. (Of course you can and should have incorrect items removed from your credit report.)
Know your FICO
Before you can improve your FICO score, you have to know your score and be sure that the credit reports from each agency are correct. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. It's inexpensive, fast, and easy to get your credit score as well as reports from all three reporting agencies. Also available are information and online tools that can help you understand how to improve your credit score.
You can get a free credit report every year from the three major 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'll be a more informed consumer and you'll be better positioned to get the most favorable mortgage.
Curious about credit scores? Call us: 6507631924.