FICO Credit Scores: What Do They Mean?

Since we live in an computer-driven society, it's not surprising that your ability to repay your mortgage loan boils down to just one number. All the years you've been paying your various bills: your mortgage, car payments, and credit card bills can be 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 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 each of the models considers a range of data available in your credit report, each agency uses the following to calculate your score:

  • Credit History - How many years have you had credit?
  • Late Payments - Have you paid more than 30 days late?
  • Your Credit Card Balances - How many accounts do you have, and how much do you owe on them?
  • Inquiries on Your Credit - How many times have lenders pulled your credit report for the purpose of lending you money?

These factors are assigned weights based on the formula being used. The result is a single number: your FICO score. Credit scores range from 300 to 800. Higher is better. Most folks who want to get a mortgage in the current environment have a score above 620.

Credit scores make a big difference in 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 improve your FICO score? Some companies promise quick fixes, but they can't do anything different than what you can do — for free. (Of course you must appeal incorrect items on your credit report.)

Getting your credit score

In order to improve your score, you must have the credit reports that are used to build it, and of course, you need the score itself. Fair Isaac, the company that invented the original FICO credit score, sells credit scores on its website: myFICO.com. It's inexpensive, fast, and easy to get your credit score along with credit reports from all three credit reporting agencies. Also available are information and tools that 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 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.

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

Curious about credit scores? Call us: 504-866-5626.

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