How FICO Credit Scores Are Calculated
Since we live in an computer-driven world, it's not surprising that your ability to repay your mortgage loan comes down to just one number.
All the years you've been paying your various bills: your mortgage, car payments, and credit card bills can be 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 agencies, each have a proprietary formula for building your 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 each of the models considers a range of data available in your credit report, the differences aren't huge; all of the agencies use the following to calculate your score:
- Your Credit History - Have you had credit for many years, or for a short time?
- Payment History - Have you paid more than 30 days late?
- Your Credit Card Balances - How many accounts? How much do you owe on your accounts?
- Inquiries on Your Credit - How many times have lenders pulled your credit for the purpose of giving you a loan?
These factors are weighted slightly differently depending on which formula the agency uses. The results are added up and distilled into a single number. Credit scores range from 300 to 800. Higher is better. Most home buyers likely find their credit scores above 620.
Your FICO score affects 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
Unfortunately, there isn't a lot you can do to immediately improve your credit score. Because the credit score is based on your lifelong credit history, it's very hard to change it quickly. (Of course you can and should appeal incorrect items on your credit report.)
Know your FICO score
To raise your credit score, you must 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 score, offers scores on its website: myFICO.com. 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 help you analyze what actions might have the greatest impact on your FICO score.
You can get a federally-mandated free credit report once per year from the three major agencies at AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is fast and inexpensive.
Now that you have all the facts, you will be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.
Curious about your credit score? Give us a call at 8668408745.