How FICO Credit Scores Are Calculated
Since we live in an automated society, it's not surprising that your ability to repay your mortgage loan boils down to a single number.
This score is built by credit reporting agencies. These agencies use the payment history of your various loans: mortgages, car/motorcycle loans, credit cards, and the like.
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 calculate a score:
- Credit History - How long have you had credit?
- Payment History - Do you have a history of late payments?
- Your Credit Card Balances - How many accounts? How much do you owe?
- Credit Inquiries - How many times have you had your credit checked for a loan?
These factors are weighted slightly differently depending on which formula the agency uses. 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 is better. Most home buyers these days have a score above 620.
Your credit score affects your interest rate
Did you know? 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
Is there any way to raise your FICO score? Some companies promise quick fixes, but they can't do anything different than what you can do — for free. You should remove any incorrect data on your credit report, which is the only "quick fix" for credit problems.
Getting your credit score
Before you can improve your score, you must know your score and ensure that the credit reports from each reporting agency are correct. Fair Isaac, the corporation that offered the original FICO credit score, sells FICO scores on myFICO.com. It's inexpensive to quickly get your FICO score from all three reporting agencies, along with your credit report. They also provide helpful information and online tools that can help you analyze what actions might have the greatest impact on your FICO score.
You can get a free credit report once a year from all three 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 will be a more informed consumer and you'll be better positioned to obtain the right mortgage for you.
Want to know more about credit scores? Give us a call: 504-866-5626.