Scoring your Credit - How's your FICO?
Since we live in an automated society, it's not surprising that your ability to repay your mortgage comes down to just one number.
Credit reporting agencies use your loan payment history to create this score.
Each of the three credit agencies has its own formula for building your credit score. The original FICO 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, each agency uses the following to calculate a credit score:
- Your Credit History - How long have you had credit?
- History of Payments - Do you pay your bills on time?
- Your Credit Card Balances - How many credit card accounts do you hold, and how much do you owe?
- Credit Inquiries - How many times have you had your credit checked for a loan?
These factors are assigned weights based on the formula being used. The results are added up and distilled into a single number. FICO scores range from 300 to 800. Higher is always better. Typical home buyers will probably find their scores falling above 620.
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.
Raising your FICO score
What can you do to improve your FICO score? Very little in the short term. Since the credit score is based on a lifetime of credit history, it is hard to change it quickly. (Of course you can and should remove incorrect data on your credit report.)
Getting your FICO score
Before you can improve your score, you must obtain your score and make certain that the credit reports from each credit reporting agency are correct. Fair Isaac, the corporation that invented the original FICO credit score, sells FICO scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score as well as credit reports from all three reporting agencies. Also available are helpful information and online tools that help you improve your credit score.
You can get a federally-mandated free credit report every year from the three major credit reporting 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.
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 credit scores? Call us: 718-441-7000.