How FICO Credit Scores Are Calculated
Since we live in an automated, it's probably not that surprising that your creditworthiness boils down to a single number.
The years of paying your various bills: your mortgage, car payments, and credit card bills can be analyzed, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.
Each of the three credit reporting agencies has its own formula for building your credit score. The original FICO score 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, all of the agencies use the following to calculate a credit score:
- 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 credit card accounts do you hold, and how much do you owe on them?
- Credit Inquiries - How many times have lenders pulled your credit for the purpose of giving you a loan?
These factors are weighted differently depending on which formula the agency uses. Each formula produces a single number which may vary a a little by agency. Credit scores range from 300 to 800. Higher is better. Most home buyers will probably find their scores falling between 620 and 800.
FICO makes a big 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. Higher scores indicate you are a better credit risk, and thus may qualify for a better mortgage rate.
Improving your score
What can you do about your FICO score? Unfortunately, not much. So called "credit repair" companies advertise quick fixes, but the score is built on your lifetime credit history, so you can't turn it around right away. (Of course you must remove incorrect data on your credit report.)
Know your FICO
Before you can improve your credit score, you have to know your score and make sure that the credit reports from each agency are correct. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. It's inexpensive, fast, and easy to get your credit score as well as credit reports from all three agencies. Also available are information and tools that help you improve your credit score.
You can get a free credit report once a 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.
Want to know more about your credit score? Call us at 352-369-4200.