How FICO Credit Scores Are Calculated
Since we live in an automated society, it's not surprising that your ability to repay your mortgage loan comes down to just one number.
Credit reporting agencies use your loan payment history to create a FICO score.
All three credit agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a credit score. The original FICO 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 build your credit score:
- Credit History - How many years have you had credit?
- Payment History - Do you have any payments later than 30 days?
- Balances on your Credit Cards - How many accounts do you hold? How much do you owe on your accounts?
- Credit Inquiries - How many times have you had your credit checked for a loan?
Each of these is assigned a value and a weight. The result is one number. FICO scores range from 300 to 800. Higher is always better. Most borrowers getting a mortgage loan these days score 620 or above.
Your score greatly affects how much you pay in interest every month
Credit 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.
Can I improve my FICO score?
Is there any way to improve your credit score? Despite what you hear from "credit repair" companies, the FICO score is calculated from your lifetime credit history, so it's not possible to raise it significantly in the short term. (Of course you must have incorrect items removed from your credit report.)
Know your FICO
Before you can improve your FICO score, you have to obtain your score and make sure that the 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 to get your FICO score from all three agencies, along with your credit report. They also provide information and 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 all three credit reporting agencies at AnnualCreditReport.com. These reports do not include a free 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 get the most favorable mortgage.
Curious about credit scores? Call us at (281) 778-0805.