FICO Credit Scores: What Do They Mean?
Since we live in an computer-driven society, it's not surprising that your ability to repay your mortgage loan comes down to a single number.
The FICO score is built by credit agencies. These agencies use the payment history of your various loans: credit cards, mortgages, car loans etcetera.
Each of the three credit reporting agencies has its own formula for building your credit score. The original FICO score was developed by Fair Isaac and Company.
While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While the formulas vary, all of the agencies use the following to calculate a credit score:
- Credit History - Have you had credit for many years, or for just a short time?
- History of Payments - Have you paid more than 30 days late?
- Your Credit Card Balances - How many accounts do you carry? How much do you owe on your accounts?
- Inquiries on Your 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 result is a single number: your FICO score. Credit scores can be as low as 300 and as high as 800. Higher is better. Most borrowers who want to get a mortgage loan have a score above 620.
FICO makes a difference in interest rates
FICO scores affect more than your ability to get a loan. They also affect your interest rate. Higher scores indicate you are probably a better credit risk, and thus may qualify for a better mortgage rate.
Can I improve my FICO score?
What can you do about your FICO score? Unfortunately, not much. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. You should, of course, remove any incorrect data on your credit report, which is the only "quick fix" for credit troubles.
Getting your credit score
In order to improve your score, you must get the reports that are used to build it, and of course, you need the score itself. Fair Isaac, the company that offered the original FICO credit score, offers scores on myFICO.com. For a reasonable fee, you can get your FICO score from all three reporting agencies, along with your credit report. Also available are information and 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 every year from the three major agencies by visiting AnnualCreditReport.com. While this report does not include a free credit score, the cost to "upgrade" your report to include a credit score is very reasonable.
Armed with this info, you will be a more informed consumer and you'll be better positioned to get the most favorable mortgage.
Curious about your credit score? Give us a call at 718-441-7000.