How FICO Credit Scores Are Calculated

Since we live in an computer-driven society, it's not surprising that your ability to repay your mortgage loan boils down to a single number. The FICO score is compiled by credit reporting agencies. These agencies use the payment history of your various loans: mortgages, car/motorcycle loans, credit cards, and others.

Each of the three credit agencies has its own formula for building your credit score. Fair Isaac and Cooriginally developed this score. . 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; they all use the following factors to build a credit score:

  • Your Credit History - How long have you had credit?
  • History of Payments - Do you pay your bills on time?
  • Balances on your Credit Cards - How many accounts do you have, and how much do you owe?
  • Credit Inquiries - How many times have you had your credit checked for a loan?

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. FICO 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.

Your credit score greatly affects how much you pay in interest every month

FICO 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.

Raising your FICO score

Is it possible to improve your credit score? Despite what you hear from "credit repair" companies, the FICO score is calculated from your lifetime credit history, so you can't turn it around right away. You must, of course, appeal for the credit agency to remove any incorrect reporting on your credit report, which is the only way to quickly improve your credit score.

How do I find out my credit score?

To improve your FICO score, you've got to obtain the credit reports that are used to build it, and of course, you need the score itself. Fair Isaac, the company that offered the original FICO credit score, offers scores on myFICO.com. For a reasonable fee, you can get your FICO from all three agencies, along with your credit report. 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 a year from the three major agencies when you visit AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is fast and inexpensive.

Now that you have all the facts, you'll be a more informed consumer and you'll be better positioned to get the right mortgage for you.

Curious about credit scores? Call us at 7184417000.

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