FICO Credit Scores: What Do They Mean?
Since we live in an computer-driven world, 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. They use the payment history of your various loans: credit cards, mortgages, car/boat loans and the like.
Equifax, TransUnion, and Experian, the three major credit 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 each of the models considers a range of data available in your credit report, the differences aren't huge; they all use the following to build your credit score:
- Your Credit History - Have you had credit for years, or for a short time?
- Payment History - Do you pay your bills on time?
- Balances on your Credit Cards - How many accounts? 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?
These factors are weighted slightly differently depending on which formula the agency uses. Each formula produces a single number which may vary a a little from one agency to another. Credit scores range from 300 to 800. Higher is always better. Typical home buyers will probably find their credit scores between 620 and 800.
Not just for qualifying
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.
Improving your score
Unfortunately, there isn't a lot you can do to immediately improve your credit score. So called "credit repair" companies advertise quick fixes, but the score is based on your lifetime credit history, so you can't turn it around right away. (Of course you can and should remove incorrect data on your credit report.)
How do I find out my FICO score?
Before you can improve your score, you have to get your score and be sure that the reports from each credit reporting agency are correct. Fair Isaac, the corporation that invented the first FICO score, sells credit scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score as well as credit reports from all three agencies. They also provide helpful information and online tools that can help you analyze what actions might have the greatest impact on your FICO score.
You can get a free credit report once per year from all three agencies by visiting 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 information, you will be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.
Curious about your credit score? Give us a call at 718-441-7000.