How FICO Credit Scores Are Calculated

Since we live in an automated, it should come as no surprise that your ability to repay virtually any loan comes down to a single number. All the years you've been paying your various bills: your mortgage, car payments, and credit card bills can be analyzed, sliced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

TransUnion, Equifax, and Experian, the three major credit reporting agencies, each have a proprietary formula for building your credit score. The original FICO score was developed by Fair Isaac and Company. 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, each agency uses the following to determine a score:

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

These factors are weighted a little bit differently depending on the formula being used. Each formula produces a single number which may vary slightly from one agency to another. FICO scores range from 300 to 800. Higher is better. Most home buyers likely find their scores between 620 and 800.

Your score greatly affects your monthly payment

Did you know? FICO scores affect more than your ability to get a loan. They also affect your interest rate. Higher scores indicate you are a better credit risk, and thus may qualify for a better mortgage rate.

Raising your FICO score

Is there any way to raise your credit score? Because the FICO score is entirely based on a lifetime of credit history, it's hard to change it quickly. You must, of course, remove any incorrect data from your credit report, which is the only way to quickly improve your credit score.

Know your FICO score

To raise your credit score, you must get the reports that are used to build it. Of course, you need the score as well. 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 credit reporting agencies. Also available are information and online tools that help you analyze what actions might have the greatest impact on your FICO score.

You can get a free credit report once a year from the three major agencies when you visit 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.

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

Want to know more about your FICO score? Give us a call at (281) 778-0805.