How FICO Credit Scores Are Calculated
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Since our world is so automated, you’re probably not surprised to hear that your ability to repay your mortgage loan comes down to a single number. Credit reporting agencies use your history of paying all types of loans in order to build this score.
Each of the three credit agencies has its own formula for building your 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, the differences aren’t huge; all of the agencies use the following to calculate a credit score:
Your Credit History – How many years have you had credit?
History of Payments – Do you pay your bills on time?
Your Credit Card Balances – How many accounts do you have? How much do you owe?
Requests for Credit – How many times have lenders pulled your credit report for the purpose of giving you a loan?
These factors are weighted differently depending on which formula the agency uses. The result is a single number: your FICO score. FICO scores range from 300 to 850. Higher is better. Most home buyers in the current environment have a score above 620.
Credit scores make a big difference in your interest rate
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.
Can I improve my FICO score?
Unfortunately, there isn’t a lot you can do to immediately improve your credit score. Since the credit score is based on a lifetime of credit history, it’s hard to change it quickly. (Of course you can and should remove incorrect data on your credit report.)
How do I find out my FICO score?
To improve your score, you’ve got to obtain the reports that are used to build it. Of course, you need the score as well. Fair Isaac, the corporation that invented the original FICO score, sells scores on its website: myFICO.com. It’s inexpensive, fast, and easy to get your credit score along with reports from all three reporting agencies. Also available are helpful information and tools that can help you improve your credit score.
You can get a federally-mandated free credit report once a 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.
Armed with this info, you’ll be a more informed consumer and you’ll be better positioned to get the right mortgage for you.