How FICO Credit Scores Are Calculated
Since we live in a computer-driven society, it should come as no surprise that your ability to repay your mortgage comes down to one number.
The years of paying your various bills: your mortgage, car payments, and credit card bills can be analyzed, sliced, diced, 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 a 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 these methods vary, each agency uses the following to build your credit score:
- Credit History - How long have you had credit?
- History of Payments - Have you paid more than 30 days late?
- Your Credit Card Balances - How many credit card accounts do you have, and how much do you owe?
- Credit Inquiries - How many times have lenders pulled your credit for the purpose of lending you money?
These factors are assigned weights based on the formula being used. The result is a single number: your FICO score. Credit scores can be as low as 300 and as high as 800. Higher scores are better. Most people getting a mortgage score 620 or above.
Credit scores make a huge 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.
Raising your credit score
Unfortunately, there isn't a lot you can do to immediately improve your credit score. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. (Of course you can and should have incorrect items removed from your credit report.)
How do I find out my credit score?
To raise your credit score, you've got to have the reports that are used to build it. Of course, you need the score as well. Fair Isaac, the corporation that offered the first FICO score, offers credit 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 helpful information and online tools that help you improve your credit score.
You can get a free credit report once a year from all three credit reporting agencies by visiting AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is fast and very inexpensive.
Now that you have all the facts, you will be a more informed consumer and you'll be better positioned to get the most favorable mortgage.
Curious about your FICO score? Call us at (443) 619-7900.