How FICO Credit Scores Are Calculated
Since our society is so computer-driven, it should come as no surprise that your creditworthiness boils down to one number.
This score is compiled by credit reporting agencies. These agencies use the payment history from all of your loans: mortgages, car/motorcycle loans, credit cards, etcetera.
TransUnion, Equifax, and Experian, the three major credit reporting agencies, each have their own proprietary formula for building your credit score. The original FICO model was developed by Fair Isaac and Company.
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 these methods vary, each agency uses the following to build your score:
- Your Credit History - How long have you had credit?
- Late Payments - Do you have any payments later than 30 days?
- Your Credit Card Balances - How many accounts do you hold, and how much do you owe on them?
- Requests for Credit - How many times have you had your credit checked for a loan?
Each of these is assigned a value and a weight. The results are added up and distilled into a single number. Credit scores range from 300 to 800. Higher is better. Most home buyers will likely find their FICO scores between 620 and 800.
Not just for qualifying
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 must have incorrect items removed from your credit report.)
Know your FICO
Before you can improve your FICO score, you must obtain your score and make certain that the reports from each agency are correct. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. For a reasonable fee, you can get your FICO from all three reporting agencies, along with your credit report. Also available are helpful information and online tools that help you improve your credit score.
You can get a federally-mandated free credit report once per year from the three major credit reporting agencies at 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 obtain the most favorable mortgage.
Curious about your FICO score? Give us a call at 504-866-5626.