You Credit Score: How's Your FICO?
Because we live in a computer-driven society, you're probably not surprised to hear that your ability to repay virtually any loan comes down to one number.
The FICO score is built by credit reporting agencies. These agencies use the payment history of your various loans: mortgages, car/motorcycle/boat loans, credit cards, etcetera.
All three credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at 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; each agency uses the following to calculate your credit score:
- Your Credit History - How many years have you had credit?
- Payment History - Do you have a history of late payments?
- Balances on your Credit Cards - How many accounts do you hold, and how much do you owe on them?
- 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 result is a single number: your FICO score. FICO scores can be as low as 300 and as high as 800. Higher scores are better. Most people who want to get a mortgage loan in the current environment have a score above 620.
Credit scores make a difference in your interest rate
FICO 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.
Can I improve my credit score?
What can you do to raise your FICO score? Unfortunately, not much. So called "credit repair" companies advertise quick fixes, but the FICO score is calculated from your lifetime credit history, so it's not possible to raise it significantly in the short term. (Of course you can and should have incorrect items removed from your credit report.)
How do I find out my credit score?
Before you can improve your score, you must obtain your score and make certain that the reports from each agency are correct. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. It's inexpensive, fast, and easy to get your credit score along with credit reports from all three credit reporting agencies. They also provide helpful information and 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 all three agencies at AnnualCreditReport.com. These reports do not include a free score, but it's very inexpensive to get one at the same time.
Armed with this info, you will be a more informed consumer and you'll be better positioned to get the most favorable mortgage.
Curious about credit scores? Give us a call at (408) 626-1879.