FICO Credit Scores: What Do They Mean?
Because our world is so automated, it should come as no surprise that your creditworthiness comes down to a single number.
All the years you've been paying your various bills: your mortgage, car payments, and credit card bills are analyzed, diced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.
The three reporting agencies use slightly different formulas to build a credit score. Fair Isaac and Cooriginally developed this score. .
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 these methods vary, the differences aren't huge; they all use the following to calculate a credit score:
- Your Credit History - How many years have you had credit?
- Payment History - Do you have a history of late payments?
- Your Credit Card Balances - How many credit card accounts do you hold, and how much do you owe?
- 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. Each formula produces a single number which may vary slightly by agency. Credit scores can be as low as 300 and as high as 800. Higher scores are better. Most home buyers these days have a score above 620.
Your FICO score affects your monthly payment
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 credit score
Is it possible to raise your FICO score? So called "credit repair" companies advertise quick fixes, but the score is calculated from your lifetime credit history, so you can't turn it around right away. You should, of course, appeal for the credit agency to remove any incorrect data on your credit report, which is the only "quick fix" for credit problems.
Know your FICO score
Before you can improve your FICO score, you must obtain your score and make certain that the credit reports from each credit reporting agency are correct. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. For a reasonable fee, you can get your FICO score from all three reporting agencies, along with your credit report. Also available are helpful information and tools that can help you improve your FICO score.
You can get a free credit report once per year from the three major agencies by visiting AnnualCreditReport.com. These reports do not include a free score, but it's very inexpensive to get one at the same time.
Armed with this info, you will be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.
Want to know more about credit scores? Call us at (707) 252-2700.