How FICO Credit Scores Are Calculated

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 history of paying loans in order to compile a FICO score.

Each of the three credit agencies has its own formula for building your 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; all of the agencies use the following factors to calculate a score:

  • Your Credit History - Have you had credit for many years, or for just a short time?
  • History of Payments - Do you pay your bills on time?
  • Credit Card Balances - How many accounts? How much do you owe?
  • Credit Inquiries - How many times have lenders pulled your credit for the purpose of giving you a loan?

These factors are assigned weights based on the formula being used. The results are added up and distilled into a single number. Credit scores can be as low as 300 and as high as 800. Higher scores are better. Most home buyers in the current environment have a score above 620.

Credit scores make a big difference in interest rates

FICO scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are a better credit risk, and thus may qualify for a better mortgage rate.

Improving your score

How can you improve your credit score? Despite what you hear from "credit repair" companies, the FICO score is built on your lifelong credit history, so you can't turn it around right away. You must appeal for the credit agency to remove any incorrect reporting on your credit report, which is the only "quick fix" for credit problems.

How do I find out my credit score?

To raise your credit score, you've got to get the reports that are used to build it, and of course, you need the score itself. Fair Isaac, the corporation that invented the first FICO credit score, offers FICO scores on myFICO.com. For a reasonable fee, you can get your FICO score from all three agencies, along with your credit report. Also available are 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 the three major agencies by visiting AnnualCreditReport.com. These reports do not include a free credit score, but it's very inexpensive to get one at the same time.

Now that you have all the facts, 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: 7184417000.

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