How's your FICO Score?
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. This score is compiled by credit reporting agencies. These agencies use the payment history of all of your loans: mortgages, car/motorcycle/boat loans, credit cards, and others.
TransUnion, Equifax, and Experian, the three major credit agencies, each have a proprietary formula for building 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 to build a credit score:
- Credit History - How long have you had credit?
- Late Payments - Do you have any payments later than 30 days?
- Balances on your Credit Cards - How many accounts? How much do you owe?
- Requests for Credit - How many times have lenders pulled your credit report for the purpose of giving you a loan?
These factors are assigned weights based on the formula being used. The results are added up and distilled into a single number. FICO scores can be as low as 300 and as high as 800. Higher scores are better. Most home buyers have a score above 620.
Your credit score greatly affects how much you pay in interest every month
Did you know? FICO scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are a better credit risk, and thus may qualify for a better mortgage rate.
Can I improve my FICO 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 FICO score is based on your lifetime credit history, so you can't turn it around right away. (Of course you can and should appeal incorrect items on your credit report.)
How do I find out my FICO score?
In order to raise your score, you've got to have the reports that are used to build it, and of course, you need the score itself. 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 as well as reports from all three agencies. They also provide 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 per year from the three major credit reporting agencies at AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is fast and very inexpensive.
Armed with this info, you will be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.