How FICO Credit Scores Are Calculated

Because our society is so computer-driven, it's probably not that surprising that your ability to repay virtually any loan boils down to one number. This score is compiled by credit agencies. These agencies use the payment history from your various loans: mortgages, car loans, credit cards, and the like.

All three major credit agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a credit score. The original FICO model 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 each of the models considers a range of data available in your credit report, all of the agencies use the following to calculate your credit score:

  • Credit History - How long have you had credit?
  • Late Payments - Do you have a history of late payments?
  • Credit Card Balances - How many credit card accounts do you hold, and how much do you owe?
  • Credit Inquiries - 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 varies slightly from one agency to another. FICO scores range from 300 to 800. Higher is better. Most home buyers likely find their scores between 620 and 800.

Your score greatly affects your interest rate

Did you know? Credit 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 raise my credit score?

What can you do to raise your FICO score? Very little in the short term. So called "credit repair" companies advertise quick fixes, but the score is calculated from your lifelong credit history, so you can't turn it around right away. (Of course you must have incorrect items removed from your credit report.)

Know your FICO score

Before you can improve your FICO score, you must obtain your score and make sure that the credit reports from each agency are correct. Fair Isaac, the company that offered the first FICO score, sells scores on myFICO.com. For a reasonable fee, you can get your FICO score from all three agencies, along with your credit report. They also provide helpful information and online tools that help you improve your credit score.

You can get a federally-mandated free credit report once a year from the three major credit reporting agencies at AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it 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 get the most favorable mortgage.

Curious about your FICO score? Call us: (408) 626-1879.

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