How FICO Credit Scores Are Calculated
Since we live in an automated, it should come as no surprise that your creditworthiness boils down to one number.
All the years you've been paying your various bills: your mortgage, vehicle payments, and credit card bills are analyzed, diced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.
All three major credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a credit score. Fair Isaac and Cooriginally developed this score. .
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, each agency uses the following to determine a score:
- Your Credit History - Have you had credit for years, or for a short time?
- History of Payments - Do you have a history of late payments?
- Your Credit Card Balances - How many accounts do you hold, and how much do you owe on them?
- Credit Inquiries - How many times have you had your credit checked for a loan?
These factors are assigned weights based on the formula being used. The results are added up and distilled into a single number. Credit scores range from 300 to 800. Higher is better. Most home buyers have a score above 620.
Credit scores make a difference in your interest rate
FICO 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.
Raising your credit score
Is there any way to improve your credit score? Since the score is based on your lifelong credit history, it's very hard to make a significant improvement in the number with quick fixes. You should, 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.
Getting your FICO score
Before you can improve your score, you have to get your score and be sure that the 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 along with credit reports from all three agencies. They also provide information and tools that can help you improve your FICO score.
You can get a free credit report once a year from all three credit reporting agencies when you visit AnnualCreditReport.com. These reports do not include a free 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 obtain the right mortgage for you.
Curious about your FICO score? Call us: (985) 429-1770.