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 built by credit reporting agencies. These agencies use the payment history of all of your loans: credit cards, mortgages, car loans and others.
The three reporting agencies use slightly different formulas to build a 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 these methods vary from one agency to another, each agency uses the following to determine your score:
- Your Credit History - Have you had credit for years, or for just a short time?
- History of Payments - Do you have any payments later than 30 days?
- Balances on your Credit Cards - How many accounts? How much do you owe on your accounts?
- Inquiries on Your Credit - 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 likely find their scores falling between 620 and 800.
FICO makes a huge difference in your interest rate
Did you know? 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.
Improving your score
Is it possible to raise your credit score? Despite what you hear from "credit repair" companies, the score is based on your lifelong credit history, so you can't turn it around right away. You must remove any incorrect data on your credit report, which is the only way to quickly improve your credit score.
Getting your FICO score
In order to raise your FICO 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 company that invented the first FICO credit score, sells FICO scores on its website: 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 tools that can help you improve your credit score.
You can get a free credit report once a year from the three major agencies at 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 will be a more informed consumer and you'll be better positioned to get the right mortgage for you.
Curious about your credit score? Call us: 352-369-4200.