FICO Credit Scores: What Do They Mean?

Since we live in a computer-driven world, it should come as no surprise that your creditworthiness comes down to one number. Credit reporting agencies use your loan payment history to create this score.

Experian, TransUnion, and Equifax, the three major credit agencies, each have their own proprietary formula for building a 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; they all use the following factors to build your credit score:

  • Credit History - How many years have you had credit?
  • Late Payments - Do you pay your bills on time?
  • Balances on your Credit Cards - How many credit card accounts do you hold, 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 weighted differently depending on which formula the agency uses. The results are added up and distilled into a single number. Credit scores range from 300 to 800. Higher scores are better. Typical home buyers likely find their FICO scores above 620.

Credit scores make a big difference in your interest rate

Did you know? FICO scores affect more than your ability to get a loan. They also affect your interest rate. Lenders give lower interest rates to individuals with higher scores.

Improving your score

What can you do to improve your FICO score? Very little in the short term. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. You must, of course, appeal for the credit agency to remove any incorrect data from your credit report, which is the only "quick fix" for credit problems.

How do I find out my FICO score?

Before you can improve your score, you have to know your score and ensure that the reports from each agency are correct. Fair Isaac, the company that invented the original FICO score, offers scores on myFICO.com. For a reasonable fee, you can quickly get your FICO score from all three reporting agencies, along with your credit report. They also provide helpful information and online tools that can help you improve your FICO score.

You can get a free credit report once per year from all three agencies by visiting AnnualCreditReport.com. These reports do not include a free credit score, but it's very inexpensive to get one at the same time.

Armed with this information, you will be a more informed consumer and you'll be better positioned to obtain the right mortgage for you.

Want to know more about your credit score? Give us a call: (408) 626-1879.

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