How FICO Credit Scores Are Calculated
Since our world is so computer-driven, it should come as no surprise that your creditworthiness comes down to one number.
Credit reporting agencies use your loan payment history to build a FICO score.
The three credit reporting agencies use slightly different formulas to build 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 each of the models considers a range of data available in your credit report, the differences aren't huge; all of the agencies use the following factors to calculate a score:
- Your Credit History - Have you had credit for years, or for a short time?
- Payment History - Do you have any payments later than 30 days?
- Your Credit Card Balances - How many accounts? How much do you owe?
- Inquiries on Your Credit - How many times have lenders pulled your credit for the purpose of giving you a loan?
These factors are assigned weights based on the formula being used. Each formula produces a single number which may vary slightly from one agency to another. FICO scores can be as low as 300 and as high as 800. Higher scores are better. Most home buyers will probably find their scores falling above 620.
FICO makes a difference in interest rates
Did you know? 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.
Raising your FICO score
What can you do to raise your FICO score? Unfortunately, not much. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. (Of course you must have incorrect items removed from your credit report.)
Know your FICO
To raise your credit score, you must get the credit reports that the agencies use to build it, and of course, you need the score itself. 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 credit reporting agencies. Also available are 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 all three agencies by visiting AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is quick and very inexpensive.
Now that you have all the facts, you will be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.
Curious about your FICO score? Call us at 703.255-5810.