How FICO Credit Scores Are Calculated
Since we live in an automated society, it's not surprising that your ability to repay your mortgage comes down to a single number.
The FICO score is created by credit reporting agencies. These agencies use the payment history of your various loans: mortgages, car loans, credit cards, and the like.
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. .
Experian uses this model and calls its score FICO. Equifax's model, based on FICO, is called BEACON, while TransUnion, which also uses a slightly modified FICO, calls its score EMPIRICA. While these methods vary from one agency to another, the differences aren't huge; they all use the following factors to build a credit score:
- Credit History - Have you had credit for years, or for just a short time?
- History of Payments - Have you paid more than 30 days late?
- Credit Card Balances - How many credit card accounts do you hold, and how much do you owe?
- Inquiries on Your Credit - How many times have lenders pulled your credit report for the purpose of giving you a loan?
These factors are weighted slightly differently depending on the formula being used. The results are added up and distilled into a single number. Credit scores range from 300 to 800. Higher is better. Most folks getting a mortgage loan these days score 620 or above.
Not just for qualifying
Did you know? 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.
Can I improve my FICO score?
Unfortunately, there isn't a lot you can do to immediately improve your credit score. Because the credit score is entirely based on a lifetime of credit history, it's difficult to change it quickly. (Of course you can and should remove incorrect data on your credit report.)
Know your FICO score
Before you can improve your score, you have to 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 reporting agencies. They also provide helpful information and online tools that help you analyze what actions might have the greatest impact on your FICO score.
You can get a federally-mandated free credit report once a year from all three credit reporting agencies by visiting AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it is quick and inexpensive.
Armed with this info, you will be a more informed consumer and you'll be better positioned to get the right mortgage for you.
Curious about your credit score? Give us a call: 630-717-3600.