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 a single number. All the years you’ve been paying your various bills: your mortgage, car payments, and credit card bills are analyzed, diced, 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 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 the formulas vary from one agency to another, the differences aren’t huge; each agency uses the following factors in calculating a credit score:
- Your Credit History – How long have you had credit?
- History of Payments – Have you paid more than 30 days late?
- Balances on your Credit Cards – How many accounts do you carry? How much do you owe on your accounts?
- Credit Inquiries – How many times have you had your credit checked for a loan?
Each of these factors is assigned a value and a weight. The result is a single number: your credit score. Credit scores range from 300 to 800. Higher is better. Most folks getting a mortgage loan in the current environment score 620 or above.
Your FICO score affects your interest rate
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
How can you improve your credit score? Because the credit score is based on a lifetime of credit history, it’s very hard to significantly improve the score with quick fixes. (Of course you can and should appeal incorrect items on your credit report.)
Know your FICO score
In order to improve your score, you’ve got to have the credit reports that the agencies use to build it. Of course, you need the score as well. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. It’s inexpensive to get your FICO score from all three reporting agencies, along with your credit report. Also available are information and tools that can help you understand how to improve your FICO score.
You can get a free credit report once per year from the three major credit reporting agencies by visiting AnnualCreditReport.com. You won’t get a free credit score from AnnualCreditReport.com, but getting it is fast and inexpensive.
Armed with this information, you’ll be a more informed consumer and you’ll be better positioned to obtain the most favorable mortgage.
The Mortgage Exchange Service LLC can answer questions about credit reports and many others.
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