FICO Credit Scores: What Do They Mean?

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. The years of paying your various bills: your mortgage, car 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 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 each of the models considers a range of data available in your credit report, the differences aren't huge; each agency uses the following to calculate your credit score:

  • Credit History - How long have you had credit?
  • History of Payments - Do you have any payments later than 30 days?
  • Your Credit Card Balances - How many accounts do you hold? How much do you owe?
  • Inquiries on Your Credit - How many times have you had your credit checked for a loan?

Each of these factors is assigned a value and a weight. The results are added up and distilled into a single number. FICO scores range from 300 to 800. Higher is better. Most home buyers in the current environment have a score above 620.

FICO makes a big difference in interest rates

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.

Can I improve my credit score?

Unfortunately, there isn't a lot you can do to immediately improve your credit score. So called "credit repair" companies advertise quick fixes, but the FICO score is built on your lifelong credit history, so you can't turn it around right away. (Of course you must appeal incorrect items on your credit report.)

Know your FICO score

In order to raise your score, you've got to have the credit reports that are used to build it, and of course, you need the score itself. Fair Isaac, the corporation that invented the first FICO credit score, sells credit scores on its website: myFICO.com. It's inexpensive, fast, and easy to get your credit score along with credit reports from all three credit reporting agencies. Also available are information and tools that can help you improve your FICO score.

You can get a federally-mandated free credit report once a year from all three credit reporting agencies by visiting AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is fast and inexpensive.

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

Want to know more about credit scores? Call us: 7072522700.

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