About the FICO Credit Score
Since we live in an automated world, it should come as no surprise that your ability to repay your mortgage comes down to a single number.
All the years you've been 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.
Equifax, TransUnion, and Experian, the three major credit agencies, each have their own proprietary formula for building a 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 these methods vary from one agency to another, each agency uses the following to build a score:
- Credit History - How many years have you had credit?
- Payment History - Have you paid more than 30 days late?
- Your Credit Card Balances - How many accounts do you hold, 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 by agency. Credit scores can be as low as 300 and as high as 800. Higher is better. Most people who want to get a mortgage in the current environment have a score above 620.
Not just for qualifying
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
How can you improve your credit score? Because the credit score is entirely based on your lifelong credit history, it's very difficult to significantly improve the score with quick fixes. (Of course you can and should appeal incorrect items on your credit report.)
Know your FICO score
Before you can improve your score, you must know your score and make sure that the reports from each agency are correct. Fair Isaac, the company that offered the original FICO credit score, sells FICO scores on myFICO.com. It's inexpensive to quickly get your FICO score from all three reporting 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 federally-mandated free credit report once a year from all three credit reporting agencies by visiting AnnualCreditReport.com. These reports do not include a free score, but it's very inexpensive to get one at the same time.
Armed with this info, you will be a more informed consumer and you'll be better positioned to get the right mortgage for you.
Want to know more about credit scores? Give us a call at (405) 615-8543.