How FICO Credit Scores Are Calculated

Since our society is so computer-driven, you're probably not surprised to hear that your creditworthiness comes down to one number. All the years you've been paying your various bills: your mortgage, car payments, and credit card bills are analyzed, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

TransUnion, Equifax, and Experian, the three major credit reporting agencies, each have a proprietary formula for building a credit score. The original FICO score was developed by Fair Isaac and Company. While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While the formulas vary, the differences aren't huge; each agency uses the following to build your credit score:

• Credit History - How many years have you had credit?
• Payment History - Do you have a history of late payments?
• Balances on your Credit Cards - How many accounts do you hold, and how much do you owe?
• Credit Inquiries - How many times have lenders pulled your credit report for the purpose of lending you money?

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 always better. Most people getting a mortgage have a score above 620.

Credit scores make a difference in your interest rate

FICO scores affect more than your ability to get a loan. They also affect your interest rate. Higher scores indicate you are probably a better credit risk, and thus may qualify for a better mortgage rate.

Improving your score

How can you improve your credit score? So called "credit repair" companies advertise quick fixes, but the score is based on your lifelong credit history, so it's not possible to raise it significantly in the short term. (Of course you must appeal incorrect items on your credit report.)

Know your FICO

In order to improve your score, you must get the credit reports that are used to build it, and of course, you need the score itself. Fair Isaac, the company that offered the first FICO credit score, offers scores on myFICO.com. It's inexpensive to get your FICO score from all three reporting agencies, along with your credit report. Also available are information and online tools that can help you understand how to improve your FICO score.

You can get a free credit report once a year from all three credit reporting agencies by visiting AnnualCreditReport.com. These reports do not include a free credit score, but it's very inexpensive to get one at the same time.

Armed with this information, you'll be a more informed consumer and you'll be better positioned to get the most favorable mortgage.

Want to know more about your FICO score? Give us a call at 7072522700.