FICO Credit Scores: What Do They Mean?
Because our society is so computer-driven, you're probably not surprised to hear that your ability to repay virtually any loan 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, diced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.
The three agencies use slightly different formulas to build a 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 from one agency to another, the differences aren't huge; each agency uses the following factors in building your credit score:
- Credit History - How many years have you had credit?
- Payment History - Do you pay your bills on time?
- Balances on your Credit Cards - How many accounts do you have, and how much do you owe on them?
- Credit Inquiries - How many times have lenders pulled your credit report for the purpose of lending you money?
These factors are assigned weights based on the formula being used. Each formula produces a single number which may vary slightly by agency. FICO scores can be as low as 300 and as high as 800. Higher scores are better. Most folks who want to get a mortgage in the current environment have a score above 620.
Not just for qualifying
Did you know? FICO scores affect more than your ability to get a loan. They also affect your interest rate. Lenders give lower interest rates to individuals with higher scores.
Can I raise my FICO score?
Is it possible to raise your FICO score? Despite what you hear from "credit repair" companies, the score is calculated from your lifelong credit history, so you can't turn it around right away. You should, of course, remove any incorrect data on your credit report, which is the only way to quickly improve your credit score.
Getting your credit score
Before you can improve your score, you must obtain your score and make certain that the reports from each agency are correct. Fair Isaac, the corporation that invented the first FICO score, offers scores on its website: myFICO.com. For a reasonable fee, you can quickly get your FICO from all three agencies, along with your credit report. Also available are 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 a year from the three major agencies at AnnualCreditReport.com. These reports do not include a free score, but it's very inexpensive to get one at the same time.
Armed with this info, you will be a more informed consumer and you'll be better positioned to get the most favorable mortgage.
Want to know more about credit scores? Give us a call at 718-441-7000.