FICO Credit Scores: What Do They Mean?

Since we live in an automated world, it should come as no surprise that your ability to repay your mortgage loan boils down to just one number. This score is compiled by credit agencies. These agencies use the payment history of all of your loans: mortgages, car loans, credit cards, etcetera.

Each of the three credit agencies has its own 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 each of the models considers a range of data available in your credit report, the differences aren't huge; each agency uses the following to calculate your credit score:

• Credit History - How many years have you had credit?
• Payment History - Do you have any payments later than 30 days?
• Credit Card Balances - How many accounts do you carry? How much do you owe on your accounts?
• 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 result is one number. FICO scores can be as low as 300 and as high as 800. Higher is always better. Most home buyers have a score above 620.

Not just for qualifying

Credit 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.

Can I improve my FICO 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. You should appeal for the credit agency to remove any incorrect data from your credit report; this is really the only way to quickly improve your credit score.

How do I find out my FICO score?

To raise your credit score, you must obtain the credit reports that are used to build it. Of course, you need the score as well. Fair Isaac, the company that offered the original FICO credit score, sells FICO scores on myFICO.com. For a reasonable fee, you can get your FICO from all three agencies, along with your credit report. 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 free credit report once per year from all three 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.

Now that you have all the facts, you'll be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.

Want to know more about credit scores? Give us a call at 3217777277.