How FICO Credit Scores Are Calculated

Because we live in a computer-driven world, you're probably not surprised to hear that your ability to repay your mortgage boils down to one number. Credit reporting agencies use your history of paying loans in order to compile this score.

All three major credit agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a score. The original FICO model was developed by Fair Isaac and Company. While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While the formulas vary from one agency to another, the differences aren't huge; each agency uses 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 pay your bills on time?
• Credit Card Balances - How many accounts do you have? How much do you owe on your accounts?
• 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. The result is one number. Credit scores range from 300 to 800. Higher scores are better. Most home buyers have a score above 620.

Not just for qualifying

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.

Raising your FICO score

Unfortunately, there isn't a lot you can do to immediately improve your credit score. So called "credit repair" companies advertise quick fixes, but the score is calculated from your lifetime credit history, so it's not possible to raise it significantly in the short term. You must appeal for the credit agency to remove any incorrect data on your credit report, which is the only way to quickly improve your credit score.

Getting your credit score

In order to raise your credit score, you've got to get the credit reports that the agencies use to build it, and of course, you need the score itself. Fair Isaac, the company that invented the first FICO credit score, offers credit scores on its website: myFICO.com. For a reasonable fee, you can quickly get your FICO score from all three reporting agencies, along with your credit report. Also available are information and online tools that 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 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'll be a more informed consumer and you'll be better positioned to obtain the right mortgage for you.

Curious about credit scores? Give us a call: 4056158543.