How FICO Credit Scores Are Calculated

Since our society is so computer-driven, it should come as no surprise that your ability to repay virtually any loan boils down to one number. All the years you've been paying your various bills: your mortgage, car payments, and credit card bills are analyzed, diced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

TransUnion, Equifax, and Experian, the three major credit reporting agencies, each have their own proprietary formula for building a credit score. The original FICO model 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 the formulas vary from one agency to another, the differences aren't huge; all of the agencies use the following in building a score:

  • Credit History - How many years have you had credit?
  • History of Payments - Do you pay your bills on time?
  • Your Credit Card Balances - 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 giving you a loan?

Each of these factors 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. Typical home buyers probably find their credit scores above 620.

Your credit score affects how much you pay in interest every month

FICO scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are a better credit risk, and thus may qualify for a better mortgage rate.

Improving your score

Is there any way to raise your FICO score? Since the credit score is based on a lifetime of credit history, it is hard to change it quickly. You must, of course, remove any incorrect reporting on your credit report; this is really the only way to quickly improve your credit score.

How do I find out my FICO score?

In order to improve your score, you must obtain the credit reports that are used to build it, and of course, you need the score itself. 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 as well as reports from all three credit reporting agencies. They also provide helpful information and tools that can help you improve your FICO score.

You can get a free credit report once per year from the three major agencies at AnnualCreditReport.com. These reports do not include a free credit score, but it's very inexpensive to get one at the same time.

Now that you have all the facts, you will be a more informed consumer and you'll be better positioned to get the right mortgage for you.

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

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