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 boils down to a single number.
This score is created by credit reporting agencies. They use the payment history from your various loans: credit cards, mortgages, car/boat loans etcetera.
All three credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a credit 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, the differences aren't huge; all of the agencies use the following factors in building your score:
- 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 have, and how much do you owe on them?
- Inquiries on Your 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. The result is a single number: your credit score. Credit scores range from 300 to 800. Higher is better. Most home buyers these days have a score above 620.
Credit scores make a huge difference in your interest rate
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.
Can I improve my credit score?
Unfortunately, there isn't a lot you can do to immediately improve your credit score. So called "credit repair" companies advertise quick fixes, but the score is built on your lifelong credit history, so you can't turn it around right away. (Of course you must remove incorrect data on your credit report.)
How do I find out my FICO score?
Before you can improve your credit score, you have to know your score and ensure that the reports from each reporting 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. They also provide information and tools that help you improve your credit score.
You can get a free credit report every year from all three credit reporting agencies at 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 info, you'll be a more informed consumer and you'll be better positioned to get the most favorable mortgage.
Want to know more about your credit score? Call us at 1-800-606-2794.