Scoring your Credit - How's your FICO?

Since we live in an automated world, it should come as no surprise that your ability to repay your mortgage loan comes down to a single number. This score is built by credit agencies. They use the payment history from your various loans: mortgages, car loans, credit cards, and others.

Experian, TransUnion, and Equifax, the three major credit reporting 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 these methods vary, each agency uses the following to calculate your credit score:

  • Credit History - Have you had credit for years, or for just a short time?
  • History of Payments - Do you have a history of late payments?
  • Balances on your Credit Cards - How many accounts do you hold? How much do you owe on your accounts?
  • Credit Inquiries - How many times have lenders pulled your credit report for the purpose of lending you money?

These factors are weighted a little bit 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 credit scores falling between 620 and 800.

FICO makes a big difference in interest rates

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 credit score

Unfortunately, there isn't a lot you can do to immediately improve your credit score. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. (Of course you must appeal incorrect items on your credit report.)

Getting your FICO score

Before you can improve your score, you must obtain your score and make sure that the reports from each agency are correct. Fair Isaac, the company that invented the original FICO credit score, sells FICO scores on its website: myFICO.com. It's inexpensive, fast, and easy to get your credit score as well as reports from all three reporting agencies. They also provide information and online tools that can help you analyze what actions might have the greatest impact on your FICO score.

You can get a federally-mandated free credit report once a year from the three major credit reporting 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 most favorable mortgage.

Curious about your credit score? Give us a call at (408) 626-1879.

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