FICO Credit Scores: What Do They Mean?

Since we live in an computer-driven world, it should come as no surprise that your ability to repay your mortgage loan comes down to just one number. This score is created by credit reporting agencies. They use the payment history of your various loans: mortgages, car/motorcycle loans, credit cards, and the like.

Each of the three credit reporting agencies has its own 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 each of the models considers a range of data available in your credit report, the differences aren't huge; each agency uses the following factors to calculate your credit score:

  • Your Credit History - Have you had credit for many years, or for just a short time?
  • Late Payments - Do you have any payments later than 30 days?
  • Your Credit Card Balances - How many accounts do you have? How much do you owe?
  • Requests for Credit - How many times have lenders pulled your credit report for the purpose of giving you a loan?

Each of these is assigned a value and a weight. Each formula produces a single number which may vary a a little from one agency to another. FICO scores can be as low as 300 and as high as 800. Higher scores are better. Most home buyers these days have a score above 620.

Not just for qualifying

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.

Improving your score

Unfortunately, there isn't a lot you can do to immediately improve your credit score. Since the credit score is based on your lifelong credit history, it's difficult to significantly improve the score with quick fixes. (Of course you must appeal incorrect items on your credit report.)

Know your FICO score

Before you can improve your FICO score, you must get your score and make sure that the credit reports from each agency are correct. Fair Isaac, the corporation that offered the original FICO score, sells FICO scores on its website: myFICO.com. It's inexpensive to get your FICO from all three reporting agencies, along with your credit report. They also provide helpful information and online tools that 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 the three major credit reporting agencies at AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it is quick and inexpensive.

Armed with this information, you will be a more informed consumer and you'll be better positioned to get the right mortgage for you.

Curious about your FICO score? Call us at 504-866-5626.

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