FICO Credit Scores: What Do They Mean?

Since our society is so computer-driven, you're probably not surprised to hear that your ability to repay virtually any loan comes down to one number. The FICO score is compiled by credit agencies. They use the payment history from your various loans: credit cards, mortgages, car loans and others.

The three reporting agencies use slightly different formulas to build a credit score. The original FICO score 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 these methods vary, each agency uses the following to build a score:

  • Credit History - Have you had credit for many years, or for a short time?
  • Late Payments - Do you have a history of late payments?
  • Balances on your Credit Cards - How many accounts? How much do you owe on your accounts?
  • Credit Inquiries - How many times have you had your credit checked for a loan?

Each of these is assigned a value and a weight. Each formula produces a single number which may vary a a little from one agency to another. Credit scores can be as low as 300 and as high as 800. Higher is better. Most home buyers probably find their scores between 620 and 800.

Credit scores make a difference in interest rates

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.

Improving your score

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

Know your FICO

To raise your FICO score, you've got to obtain the credit reports that are used to build it, and of course, you need the score itself. Fair Isaac, the company that invented the original FICO credit score, sells FICO scores on myFICO.com. It's inexpensive to get your FICO from all three agencies, along with your credit report. Also available are information and tools that help you understand how to improve your credit score.

You can get a free credit report once a year from the three major agencies when you visit 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'll be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.

Want to know more about your FICO score? Give us a call at 4086261879.

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