How FICO Credit Scores Are Calculated
Since we live in an computer-driven world, it should come as no surprise that your ability to repay your mortgage comes down to just one number.
This score is built by credit agencies. These agencies use the payment history from your various loans: credit cards, mortgages, car loans etcetera.
TransUnion, Equifax, and Experian, the three major credit reporting agencies, each have a proprietary formula for building your 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 from one agency to another, the differences aren't huge; each agency uses the following factors in calculating a score:
- Credit History - Have you had credit for many years, or for just a short time?
- Payment History - Do you have any payments later than 30 days?
- Your Credit Card Balances - How many accounts do you hold, and how much do you owe on them?
- Credit Inquiries - How many times have lenders pulled your credit for the purpose of giving you a loan?
These factors are weighted differently depending on which formula the agency uses. The result is one number. FICO scores can be as low as 300 and as high as 800. Higher scores are better. Most folks who want to get a mortgage loan score 620 or above.
Not just for qualifying
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.
Improving your score
What can you do to raise your FICO score? Very little in the short term. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. You should, of course, remove any incorrect data on your credit report; this is really the only "quick fix" for credit troubles.
How do I find out my credit score?
Before you can improve your credit score, you have to obtain 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 along with reports from all three credit reporting agencies. Also available are helpful information and tools that help you analyze what actions might have the greatest impact on your FICO score.
You can get a free credit report once a 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.
Armed with this information, you'll be a more informed consumer and you'll be better positioned to get the most favorable mortgage.
Curious about your FICO score? Give us a call at 7032555810.