How FICO Credit Scores Are Calculated

Since we live in an computer-driven world, it should come as no surprise that your ability to repay your mortgage loan boils down to just one number. The FICO score is built by credit agencies. They use the payment history from all of your loans: mortgages, car loans, credit cards, and others.

TransUnion, Equifax, and Experian, the three major credit reporting agencies, each have their own proprietary 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, all of the agencies use the following to build your credit score:

  • Your Credit History - How many years have you had credit?
  • History of Payments - Have you paid more than 30 days late, and how often?
  • Balances on your Credit Cards - How many accounts do you hold, and how much do you owe on them?
  • Credit Inquiries - How many times have lenders pulled your credit for the purpose of giving you a loan?

Each of these is assigned a value and a weight. Each formula produces a single number which varies slightly by agency. Credit scores can be as low as 300 and as high as 800. Higher is better. Typical home buyers will likely find their credit scores between 620 and 800.

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.

Improving your score

How can you raise your credit score? Because the credit score is based on a lifetime of 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 certain that the credit reports from each agency are correct. Fair Isaac, the company that invented the first FICO credit score, sells scores on myFICO.com. It's inexpensive to quickly get your FICO score from all three agencies, along with your credit report. Also available are helpful information and online tools that can help you understand how to improve your FICO score.

You can get a free credit report once a year from all three agencies at AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is fast and very inexpensive.

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: (408) 626-1879.

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