FICO - Your Credit Score
Since we live in an automated world, it's not surprising that your ability to repay your mortgage comes down to a single number. All the years you've been paying your various bills: your mortgage, car payments, and credit card bills can be analyzed, sliced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.
TransUnion, Equifax, and Experian, the three major credit agencies, each have a proprietary formula for building your 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 the formulas vary from one agency to another, each agency uses the following to determine a score:
- Your Credit History - How many years have you had credit?
- Payment History - Do you have any payments later than 30 days?
- Credit Card Balances - How many accounts do you carry? How much do you owe?
- Inquiries on Your Credit - How many times have lenders pulled your credit report for the purpose of lending you money?
Each of these factors is assigned a value and a weight. Each formula produces a single number which may vary slightly by agency. FICO scores range from 300 to 800. Higher scores are better. Most home buyers in the current environment have a score above 620.
FICO makes a huge difference in interest rates
Credit 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 FICO score
What can you do to improve your FICO score? Very little in the short term. So called "credit repair" companies advertise quick fixes, but the score is formulated from your lifelong credit history, so it's not possible to raise it significantly in the short term. You must, of course, remove any incorrect data from your credit report, which is the only "quick fix" for credit problems.
Getting your FICO score
To raise your score, you must get the credit reports that the agencies use to build it, and of course, you need the score itself. Fair Isaac, the company that offered the original FICO credit score, offers FICO scores on myFICO.com. For a reasonable fee, you can get your FICO from all three reporting agencies, along with your credit report. They also provide information and tools that can help you analyze what actions might have the greatest impact on your FICO score.
You can get a federally-mandated free credit report once per year from all three credit reporting agencies at AnnualCreditReport.com. These reports do not include a free credit score, but it's very inexpensive to get one at the same time.
Armed with this info, you'll be a more informed consumer and you'll be better positioned to get the most favorable mortgage.