FICO Credit Scores: What Do They Mean?
Since we live in an computer-driven society, it should come as no surprise that your ability to repay your mortgage comes down to a single number.
Credit reporting agencies use your history of paying all types of loans to create this score.
Equifax, TransUnion, and Experian, the three major credit reporting agencies, each have their own proprietary formula for building 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 each of the models considers a range of data available in your credit report, all of the agencies use the following to calculate a credit score:
- Credit History - How long have you had credit?
- History of Payments - Do you pay your bills on time?
- Balances on your Credit Cards - How many accounts do you hold? How much do you owe?
- 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. Each formula produces a single number which may vary a a little from one agency to another. FICO scores range from 300 to 800. Higher is better. Most people getting a mortgage in the current environment score 620 or above.
Your score greatly affects how much you pay in interest every month
Did you know? FICO scores affect more than your ability to get a loan. They also affect your interest rate. Higher scores indicate you are a better credit risk, and thus may qualify for a better mortgage rate.
Can I improve my FICO score?
Is there any way to improve your credit score? Because the score is based on a lifetime of credit history, it's difficult to significantly improve the number with quick fixes. You must appeal for the credit agency to remove any incorrect reporting on your credit report, which is the only "quick fix" for credit troubles.
Know your FICO
To improve your score, you've got to obtain the credit reports that are used to build it, and of course, you need the score itself. Fair Isaac, the company that invented the original FICO score, sells FICO scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score as well as credit reports from all three agencies. Also available are 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. 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 most favorable mortgage.
Want to know more about credit scores? Give us a call: (434) 975-5626.