FICO Credit Scores: What Do They Mean?

Since we live in an automated society, it should come as no surprise that your ability to repay your mortgage comes down to just one number. Credit reporting agencies use your history of paying all types of loans in order to compile this score.

All three major credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a credit score. The original FICO score was developed by Fair Isaac and Company. While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While the formulas vary, the differences aren't huge; they all use the following factors in calculating your credit score:

  • Credit History - Have you had credit for many years, or for a short time?
  • History of Payments - Do you have any payments later than 30 days?
  • Your Credit Card Balances - How many credit card accounts do you hold, and how much do you owe on them?
  • Inquiries on Your Credit - How many times have lenders pulled your credit for the purpose of giving you a loan?

Each of these factors is assigned a value and a weight. The result is a single number: your credit score. Credit scores range from 300 to 800. Higher is better. Typical home buyers probably find their credit scores falling above 620.

Your score affects your monthly payment

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.

Raising your FICO score

What can you do to improve your FICO score? Unfortunately, not much. Despite what you hear from "credit repair" companies, the FICO score is calculated from your lifetime credit history, so you can't turn it around right away. (Of course you must appeal incorrect items on your credit report.)

Know your FICO

To improve your FICO score, you've got to get the reports that the agencies use to build it. Of course, you need the score as well. Fair Isaac, the company that invented the original FICO credit score, offers scores on myFICO.com. It's inexpensive to quickly get your FICO from all three agencies, along with your credit report. Also available are information and tools that can help you understand how to improve your FICO score.

You can get a federally-mandated free credit report every year from the three major agencies by visiting AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is quick and inexpensive.

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

Curious about credit scores? Give us a call: (408) 626-1879.

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