How FICO Credit Scores Are Calculated

Because our world is so automated, it's probably not that surprising that your ability to repay virtually any loan boils down to a single number. The years of paying your various bills: your mortgage, car payments, and credit card bills can be analyzed, sliced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

Experian, TransUnion, and Equifax, the three major credit agencies, each have a proprietary formula for building your credit score. The original FICO score was developed by Fair Isaac and Company. Experian uses this model and calls its score FICO. Equifax's model, based on FICO, is called BEACON, while TransUnion, which also uses a slightly modified FICO, calls its score EMPIRICA. While these methods vary from one agency to another, the differences aren't huge; they all use the following to calculate your credit score:

  • Your Credit History - How many years have you had credit?
  • Payment History - Do you pay your bills on time?
  • Balances on your Credit Cards - How many credit card accounts do you hold, and how much do you owe on them?
  • Requests for Credit - 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 borrowers who want to get a mortgage loan these days score 620 or above.

Your credit score affects your interest rate

FICO scores affect more than your ability to get a loan. They also affect your interest rate. Lenders give lower interest rates to individuals with higher scores.

Improving your score

What can you do to raise your FICO score? Unfortunately, not much. Since the credit score is entirely based on your lifelong credit history, it's very hard to significantly improve the number with quick fixes. You must, of course, appeal for the credit agency to remove any incorrect reporting on your credit report, which is the only way to quickly improve your credit score.

Know your FICO score

To improve your FICO score, you've got to obtain the credit reports that are used to build it. Of course, you need the score as well. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. For a reasonable fee, you can quickly get your FICO from all three reporting agencies, along with your credit report. Also available are information and tools that help you improve your FICO score.

You can get a federally-mandated free credit report once a year from the three major agencies when you visit AnnualCreditReport.com. While this report does not include a free credit score, the cost to "upgrade" your report to include a credit score is very reasonable.

Armed with this information, you will 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? Call us at 8668408745.


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Carter Financial Solutions

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Stockton, CA 95207