Scoring your Credit - How's your FICO?
Since we live in an automated world, it should come as no surprise that your ability to repay your mortgage loan boils down to just one number.
The FICO score is built by credit reporting agencies. These agencies use the payment history of all of your loans: mortgages, car loans, credit cards, and the like.
Experian, TransUnion, and Equifax, the three major credit agencies, each have a proprietary formula for building a credit score. The original FICO was developed by Fair Isaac and Company.
While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While these methods vary, the differences aren't huge; each agency uses the following to build your score:
- Your Credit History - Have you had credit for many years, or for just a short time?
- Late Payments - Have you paid more than 30 days late?
- Your Credit Card Balances - How many accounts? How much do you owe on your accounts?
- Inquiries on Your 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. The result is one number. FICO scores can be as low as 300 and as high as 800. Higher scores are better. Typical home buyers probably find their credit scores falling above 620.
Your credit score affects how much you pay in interest every month
Did you know? 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 FICO score
How can you improve your FICO score? Because the score is based on a lifetime of credit history, it's very hard to significantly improve the score with quick fixes. You should remove any incorrect reporting from your credit report; this is really the only way to quickly improve your credit score.
Know your FICO score
Before you can improve your FICO score, you have to get your score and make sure that the credit reports from each 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 credit reports from all three reporting agencies. They also provide information and online tools that can help you analyze what actions might have the greatest impact on your FICO score.
You can get a federally-mandated free credit report every year from the three major credit reporting agencies when you visit 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'll be a more informed consumer and you'll be better positioned to get the most favorable mortgage.
Curious about your credit score? Call us: 703.255-5810.