FICO Credit Scores: What Do They Mean?
Since we live in an automated world, it should come as no surprise that your ability to repay your mortgage loan boils down to a single number. This score is created by credit agencies. These agencies use the payment history of all of your loans: mortgages, car/motorcycle/boat loans, credit cards, et cetera.
Experian, TransUnion, and Equifax, the three major credit reporting agencies, each have a proprietary formula for building your 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 the formulas vary, the differences aren’t huge; they all use the following factors to calculate a credit score:
- Credit History – How many years have you had credit?
- History of Payments – Do you pay your bills on time?
- Credit Card Balances – How many accounts do you hold, and how much do you owe?
- Inquiries on Your Credit – 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 slightly from one agency to another. Credit scores can be as low as 300 and as high as 800. Higher is always better. Most people who want to get a mortgage these days have a score above 620.
Your score greatly affects how much you pay in interest every month
Did you know? 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.
Can I raise my FICO score?
Unfortunately, there isn’t a lot you can do to immediately improve your credit score. Since the FICO score is based on a lifetime of credit history, it’s hard to change it quickly. You must, of course, remove any incorrect reporting from your credit report, which is the only “quick fix” for credit troubles.
Know your FICO score
In order to raise your credit 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 first FICO credit score, sells credit scores on myFICO.com. For a reasonable fee, you can get your FICO from all three reporting agencies, along with your credit report. They also provide information and tools that help you improve your credit score.
You can get a free credit report every 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 get the right mortgage for you.