How FICO Credit Scores Are Calculated

Since we live in an computer-driven society, it should come as no surprise that your ability to repay your mortgage comes down to a single number. This score is built by credit agencies. They use the payment history of all of your loans: credit cards, mortgages, car loans and others.

The three agencies use slightly different formulas to build 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, all of the agencies use the following to determine your score:

• Your Credit History - How many years have you had credit?
• Payment History - Have you paid more than 30 days late?
• Credit Card Balances - How many credit card accounts do you have, and how much do you owe on them?
• Credit Inquiries - How many times have you had your credit checked for a loan?

These factors are weighted a little bit differently depending on which formula the agency uses. The result is a single number: your FICO score. Credit scores can be as low as 300 and as high as 800. Higher is always better. Most home buyers these days have a score above 620.

FICO makes a huge difference in your interest rate

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 can and should have incorrect items removed from your credit report.)

Know your FICO score

Before you can improve your credit score, you have to obtain your score and make certain that the credit 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 as well as credit reports from all three reporting agencies. They also provide information and tools that can help you understand how to improve your credit score.

You can get a free credit report once per year from all three credit reporting agencies at AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is fast and very inexpensive.

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 credit scores? Give us a call: (800)593-0143.