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 just one number. The years of paying your various bills: your mortgage, vehicle payments, and credit card bills can be analyzed, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.
The three reporting agencies use slightly different formulas to build a 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 each of the models considers a range of data available in your credit report, the differences aren't huge; each agency uses the following in building a credit score:
- Your Credit History - How many years have you had credit?
- Payment History - Do you have a history of late payments?
- Balances on your Credit Cards - How many credit card accounts do you hold, and how much do you owe?
- Inquiries on Your Credit - How many times have you had your credit checked for a loan?
These factors are assigned weights based on the formula being used. Each formula produces a single number which varies slightly by agency. Credit scores can be as low as 300 and as high as 800. Higher scores are better. Most borrowers getting a mortgage loan these days have a score above 620.
Your score greatly 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
Unfortunately, there isn't a lot you can do to immediately improve your credit score. Because the score is based on a lifetime of credit history, it is difficult to change it quickly. (Of course you must appeal incorrect items on your credit report.)
How do I find out my credit score?
Before you can improve your FICO score, you must get your score and make sure that the reports from each credit reporting agency are correct. 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 agencies, along with your credit report. They also provide helpful information and tools that can help you improve your FICO score.
You can get a federally-mandated free credit report once per year from the three major agencies by visiting AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is fast and inexpensive.
Armed with this info, you'll be a more informed consumer and you'll be better positioned to get the right mortgage for you.