FICO Credit Scores: What Do They Mean?
Since we live in an automated society, it's not surprising that your ability to repay your mortgage loan comes down to just one number.
The FICO score is built by credit agencies. They use the payment history of your various loans: credit cards, mortgages, car loans etcetera.
Each of the three credit reporting agencies has its own formula for building your credit score. The original FICO 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 the formulas vary from one agency to another, all of the agencies use the following to calculate your score:
- Credit History - Have you had credit for many years, or for a short time?
- Late Payments - Do you have any payments later than 30 days?
- Your Credit Card Balances - How many accounts do you have, and how much do you owe on them?
- Inquiries on Your Credit - How many times have you had your credit checked for a loan?
These factors are assigned weights based on the formula being used. The results are added up and distilled into a single number. FICO scores can be as low as 300 and as high as 800. Higher is always better. Most folks getting a mortgage loan have a score above 620.
Your credit score greatly affects your interest rate
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.
Raising your FICO score
What can you do to improve your FICO score? Very little in the short term. So called "credit repair" companies advertise quick fixes, but the FICO score is calculated from your lifelong credit history, so you can't turn it around right away. You should, of course, remove any incorrect data from your credit report; this is really the only "quick fix" for credit problems.
How do I find out my credit score?
Before you can improve your score, you must obtain your score and make certain that the reports from each agency are correct. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. It's inexpensive, fast, and easy to get your credit score as well as reports from all three credit reporting agencies. Also available are helpful 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 every year from the three major agencies when you visit 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 will be a more informed consumer and you'll be better positioned to obtain the right mortgage for you.
Curious about your credit score? Give us a call at 214-300-8756.