About the FICO Credit Score
Because we live in an automated, it should come as no surprise that your creditworthiness boils down to one number. The years of paying your various bills: your mortgage, car payments, and credit card bills are analyzed, sliced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.
All three major credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a 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, each agency uses the following to calculate your credit score:
- Credit History - Have you had credit for years, or for just a short time?
- Payment History - Do you have any payments later than 30 days?
- Credit Card Balances - How many accounts do you hold? How much do you owe?
- Requests for Credit - How many times have you had your credit checked for a loan?
These factors are weighted slightly differently depending on which formula the agency uses. The result is a single number: your credit score. Credit scores can be as low as 300 and as high as 800. Higher is better. Typical home buyers probably find their FICO scores above 620.
Not just for qualifying
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
Unfortunately, there isn't a lot you can do to immediately improve your credit score. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. (Of course you must appeal incorrect items on your credit report.)
Know your FICO
Before you can improve your FICO score, you must get your score and make certain 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. You won't get a free credit score from AnnualCreditReport.com, but getting it is quick and very inexpensive.
Armed with this info, you'll be a more informed consumer and you'll be better positioned to obtain the right mortgage for you.