How FICO Credit Scores Are Calculated

Because we live in an automated, it's probably not that surprising that your ability to repay your mortgage comes down to a single number. All the years you've been paying your various bills: your mortgage, vehicle payments, and credit card bills can be analyzed, diced, 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 model was developed by Fair Isaac and Company. While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While these methods vary, each agency uses the following to calculate your score:

• Your Credit History - How many years have you had credit?
• Payment History - Have you paid more than 30 days late?
• Your Credit Card Balances - How many accounts do you have, and how much do you owe on them?
• Inquiries on Your Credit - 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 can be as low as 300 and as high as 800. Higher scores are better. Most folks who want to get a mortgage loan in the current environment score 620 or above.

Credit scores make a huge difference in interest rates

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 credit score

What can you do to raise your FICO score? Very little in the short term. Because the FICO score is based on your lifelong credit history, it's hard to change it quickly. (Of course you can and should remove incorrect data on your credit report.)

Getting your FICO score

Before you can improve your credit score, you must obtain your score and ensure 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 quickly get your FICO score from all three agencies, along with your credit report. They also provide helpful information and tools that can 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. You won't get a free credit score from AnnualCreditReport.com, but getting it is fast and very inexpensive.

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

Want to know more about your FICO score? Give us a call: (707) 252-2700.