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 boils down to a single number. The years of 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.

All three major credit agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a credit score. The original FICO model 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 each of the models considers a range of data available in your credit report, the differences aren't huge; they all use the following in building a score:

  • Credit History - Have you had credit for years, or for just a short time?
  • History of Payments - Do you have a history of late payments?
  • Balances on your Credit Cards - How many credit card accounts do you have, and how much do you owe on them?
  • 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. Each formula produces a single number which may vary a a little from one agency to another. FICO scores can be as low as 300 and as high as 800. Higher is better. Most borrowers getting a mortgage loan in the current environment have a score above 620.

FICO makes a difference in interest rates

FICO scores are used for more than just determining whether or not you qualify for a mortgage. Lenders give lower interest rates to individuals with higher scores.

Improving your score

Unfortunately, there isn't a lot you can do to immediately improve your credit score. Since the score is entirely based on your lifelong credit history, it's very difficult to significantly improve the score with quick fixes. You should, of course, remove any incorrect reporting on your credit report; this is really the only "quick fix" for credit troubles.

Getting your FICO score

Before you can improve your FICO score, you have to know your score and make certain that the credit reports from each credit reporting agency are correct. Fair Isaac, the company that offered the original FICO score, offers credit scores on its website: myFICO.com. For a reasonable fee, you can quickly get your FICO from all three agencies, along with your credit report. They also provide information and online tools that can help you analyze what actions might have the greatest impact on your FICO score.

You can get a federally-mandated free credit report once a year from the three major credit reporting agencies at AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it is fast and inexpensive.

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 credit scores? Give us a call at (321) 777-7277.

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