How FICO Credit Scores Are Calculated
Since we live in an computer-driven society, it's not surprising that your ability to repay your mortgage loan boils down to just one number.
This score is compiled by credit reporting agencies. These agencies use the payment history of all of your loans: credit cards, mortgages, car loans and the like.
All three credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a score. Fair Isaac and Cooriginally developed this score. .
While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While each of the models considers a range of data available in your credit report, all of the agencies use the following to build your credit score:
- Credit History - How long have you had credit?
- Payment History - Do you pay your bills on time?
- Your Credit Card Balances - How many accounts do you have, and how much do you owe?
- Requests for Credit - How many times have lenders pulled your credit for the purpose of lending you money?
These factors are assigned weights based on the formula being used. Each formula produces a single number which may vary slightly by agency. FICO scores range from 300 to 800. Higher is better. Typical home buyers will likely find their FICO scores between 620 and 800.
Your score greatly affects your monthly payment
FICO scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are probably a better credit risk, and thus may qualify for a better mortgage rate.
Can I raise my FICO score?
Unfortunately, there isn't a lot you can do to immediately improve your credit score. Because the FICO score is based on your lifelong credit history, it is difficult to change it quickly. (Of course you can and should remove incorrect data on your credit report.)
Getting your FICO score
In order to improve your score, you've got to get the reports that are used to build it. Of course, you need the score as well. Fair Isaac, the company that offered the first FICO score, offers credit scores on its website: myFICO.com. It's inexpensive to get your FICO score from all three agencies, along with your credit report. Also available are helpful information and online tools that help you analyze what actions might have the greatest impact on your FICO score.
You can get a federally-mandated free credit report once per year from all three agencies by visiting AnnualCreditReport.com. These reports do not include a free score, but it's very inexpensive to get one at the same time.
Armed with this information, you'll be a more informed consumer and you'll be better positioned to get the right mortgage for you.
Curious about your FICO score? Call us at 703.255-5810.