How FICO Credit Scores Are Calculated

Since we live in an computer-driven society, it's not surprising that your ability to repay your mortgage loan boils down to a single number. The FICO score is compiled by credit reporting agencies. These agencies use the payment history from all of your loans: mortgages, car loans, credit cards, etcetera.

Equifax, TransUnion, and Experian, the three major credit reporting agencies, each have their own 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, the differences aren't huge; all of the agencies use the following to calculate your score:

  • Credit History - How many years have you had credit?
  • Late Payments - Have you paid more than 30 days late?
  • Your Credit Card Balances - How many 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. The result is one number. Credit scores range from 300 to 800. Higher is better. Typical home buyers likely find their FICO scores falling between 620 and 800.

FICO makes a huge difference in interest rates

Did you know? Credit 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.

Raising your credit score

What can you do to improve your FICO score? Unfortunately, not much. Since the credit score is based on your lifelong credit history, it is difficult to make a significant improvement in the score with quick fixes. (Of course you must remove incorrect data on your credit report.)

Know your FICO

Before you can improve your FICO score, you have to know your score and ensure that the reports from each agency are correct. Fair Isaac, the company that offered the original FICO credit score, offers scores on myFICO.com. It's inexpensive to quickly get your FICO score from all three reporting agencies, along with your credit report. They also provide information and online 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 agencies by visiting AnnualCreditReport.com. These reports do not include a free credit score, but it's very inexpensive to get one at the same time.

Now that you have all the facts, you'll be a more informed consumer and you'll be better positioned to get the most favorable mortgage.

Curious about your FICO score? Give us a call at 630-717-3600.