How FICO Credit Scores Are Calculated

Since we live in an automated world, it's not surprising that your ability to repay your mortgage loan comes down to a single number. Credit reporting agencies use your loan payment history to compile your FICO score.

The three agencies use slightly different formulas to build a credit score. Fair Isaac and Cooriginally developed this score. . While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While these methods vary from one agency to another, the differences aren't huge; each agency uses the following to calculate a credit score:

• Your Credit History - How many years have you had credit?
• History of Payments - Do you pay your bills on time?
• Balances on your Credit Cards - How many accounts do you have, and how much do you owe on them?
• Requests for Credit - How many times have lenders pulled your credit for the purpose of lending you money?

Each of these is assigned a value and a weight. The result is one number. Credit scores range from 300 to 800. Higher scores are better. Most home buyers have a score above 620.

FICO makes a difference in your interest rate

Did you know? Credit scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are probably a better credit risk, and thus may qualify for a better mortgage rate.

Improving your score

What can you do to raise your FICO score? Unfortunately, not much. So called "credit repair" companies advertise quick fixes, but the FICO score is based on your lifelong credit history, so it's not possible to raise it significantly in the short term. You should, of course, appeal for the credit agency to remove any incorrect data from your credit report; this is really the only way to quickly improve your credit score.

Know your FICO

Before you can improve your credit score, you have to get your score and be 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 reports from all three reporting agencies. They also provide helpful information and tools that can help you improve your FICO score.

You can get a federally-mandated free credit report once a year from the three major credit reporting agencies when you visit AnnualCreditReport.com. These reports do not include a free credit score, but it's very inexpensive to get one at the same time.

Now that you have all the facts, 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 credit scores? Give us a call: 7072522700.