FICO Credit Scores: What Do They Mean?

Because we live in a computer-driven society, it should come as no surprise that your ability to repay your mortgage loan boils down to one number. The FICO score is built by credit agencies. These agencies use the payment history from all of your loans: credit cards, mortgages, car loans etcetera.

Equifax, TransUnion, and Experian, the three major credit agencies, each have their own proprietary formula for building a credit score. The original FICO model was developed by Fair Isaac and Company. While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While each of the models considers a range of data available in your credit report, the differences aren't huge; all of the agencies use the following to build your score:

  • Credit History - How many years have you had credit?
  • Payment History - Do you pay your bills on time?
  • Your Credit Card Balances - How many credit card accounts do you have, and how much do you owe?
  • 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. The result is one number. Credit scores range from 300 to 800. Higher is better. Most folks who want to get a mortgage in the current environment score 620 or above.

Not just for qualifying

Did you know? Credit scores are used for more than just determining whether or not you qualify for a mortgage. Lenders give lower interest rates to individuals with higher scores.

Can I improve my FICO score?

What can you do to raise your FICO score? Very little in the short term. So called "credit repair" companies advertise quick fixes, but the score is based on your lifelong credit history, so it's not possible to raise it significantly in the short term. (Of course you must have incorrect items removed from your credit report.)

Getting your FICO score

Before you can improve your credit score, you have to know your score and ensure that the reports from each reporting agency are correct. Fair Isaac, the corporation that offered the original FICO credit score, sells credit scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score along with credit reports from all three agencies. Also available are information and online tools that can help you understand how to improve your credit score.

You can get a federally-mandated free credit report once per year from the three major agencies by visiting AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it is quick and inexpensive.

Armed with this information, you'll be a more informed consumer and you'll be better positioned to get the right mortgage for you.

Curious about credit scores? Give us a call: 718-441-7000.

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