How FICO Credit Scores Are Calculated

Since our world is so automated, you're probably not surprised to hear that your creditworthiness comes down to one number. All the years you've been paying your various bills: your mortgage, vehicle payments, and credit card bills are analyzed, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

The three agencies use slightly different formulas to build a credit score. The original FICO score was developed by Fair Isaac and Company. While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While these methods vary from one agency to another, all of the agencies use the following to determine a credit score:

  • Credit History - Have you had credit for years, or for a short time?
  • History of Payments - Have you paid more than 30 days late, and how often?
  • Balances on your Credit Cards - How many accounts? How much do you owe?
  • Requests for Credit - How many times have you had your credit checked for a loan?

These factors are weighted a little bit differently depending on the formula being used. 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 scores are better. Most borrowers getting a mortgage loan these days have a score above 620.

Not just for qualifying

FICO scores affect more than your ability to get a loan. They also affect your interest rate. Higher scores indicate you are probably a better credit risk, and thus may qualify for a better mortgage rate.

Improving your score

What can you do to improve your FICO score? Very little in the short term. Because the credit score is based on a lifetime of credit history, it's very hard to change it quickly. You must, of course, remove any incorrect reporting from your credit report; this is the only "quick fix" for credit troubles.

Know your FICO score

In order to improve your score, you must have the reports that are used to build it. Of course, you need the score as well. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. For a reasonable fee, you can quickly get your FICO from all three agencies, along with your credit report. They also provide helpful information and tools that help you understand how to improve your credit score.

You can get a free credit report once per year from the three major credit reporting agencies by visiting AnnualCreditReport.com. While this report does not include a free credit score, the cost to "upgrade" your report to include a credit score is very reasonable.

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

Want to know more about credit scores? Give us a call at 877-310-6200.

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