How FICO Credit Scores Are Calculated
Since we live in an automated society, it's not surprising that your ability to repay your mortgage loan comes down to a single number. Credit reporting agencies use your loan payment history in order to create a FICO score.
The three reporting agencies use slightly different formulas to build 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 these methods vary, the differences aren't huge; all of the agencies use the following factors in building a credit score:
- Your Credit History - How long have you had credit?
- Late Payments - Do you have any payments later than 30 days?
- Credit Card Balances - How many accounts do you have, and how much do you owe?
- Credit Inquiries - How many times have you had your credit checked for a loan?
These factors are assigned weights based on the formula being used. The result is a single number: your credit score. FICO scores can be as low as 300 and as high as 800. Higher is always better. Most home buyers will probably find their FICO scores above 620.
FICO makes a huge difference in your interest rate
Did you know? 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?
Is there any way to improve your FICO score? Because the credit score is entirely based on a lifetime of credit history, it is difficult to change it quickly. You must, of course, remove any incorrect reporting from your credit report; this is the only "quick fix" for credit problems.
How do I find out my credit score?
To raise your credit score, you must obtain the credit reports that the agencies use to build it. Of course, you need the score as well. Fair Isaac, the corporation that offered the original FICO score, offers scores on myFICO.com. It's inexpensive to get your FICO score from all three agencies, along with your credit report. They also provide information and online tools that can help you understand how to improve your FICO score.
You can get a federally-mandated free credit report once a year from all three 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.