FICO Credit Scores: What Do They Mean?
Since we live in an computer-driven society, it's not surprising that your ability to repay your mortgage loan comes down to just one number.
This score is created by credit agencies. These agencies use the payment history from all of your loans: credit cards, mortgages, car/boat loans and the like.
The three credit reporting agencies use slightly different formulas to build a credit score. Fair Isaac and Cooriginally developed this score. .
While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While each of the models considers a range of data available in your credit report, each agency uses the following to calculate your score:
- Credit History - Have you had credit for many years, or for a short time?
- History of Payments - Have you paid more than 30 days late?
- Your Credit Card Balances - How many credit card accounts do you hold, and how much do you owe on them?
- Requests for Credit - 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. The results are added up and distilled into a single number. FICO scores range from 300 to 800. Higher is better. Most borrowers getting a mortgage in the current environment have a score above 620.
Not just for qualifying
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.
Can I improve my credit score?
What can you do to improve your FICO score? Very little in the short term. Since the score is based on a lifetime of credit history, it's very difficult to make a significant change in the number with quick fixes. (Of course you can and should remove incorrect data on your credit report.)
How do I find out my FICO score?
Before you can improve your score, you must get your score and make sure that the credit reports from each agency are correct. Fair Isaac, the company that invented the original FICO credit score, sells scores on its website: myFICO.com. It's inexpensive, fast, and easy to get your credit score along with reports from all three credit reporting agencies. Also available are information and online tools that help you analyze what actions might have the greatest impact on your FICO score.
You can get a federally-mandated free credit report once per year from all three agencies at AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is quick 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 right mortgage for you.
Curious about credit scores? Give us a call: (408) 626-1879.