How FICO Credit Scores Are Calculated
Because we live in a computer-driven society, it should come as no surprise that your ability to repay virtually any loan boils down to one number.
This score is compiled by credit reporting agencies. They use the payment history from all of your loans: credit cards, mortgages, car loans etcetera.
TransUnion, Equifax, and Experian, the three major credit agencies, each have a proprietary formula for building your credit score. The original FICO model was developed by Fair Isaac and Company.
While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "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 in calculating your score:
- Credit History - Have you had credit for many years, or for a short time?
- Payment History - Do you pay your bills on time?
- Your Credit Card Balances - How many accounts do you carry? How much do you owe on your accounts?
- Credit Inquiries - 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. The result is a single number: your credit score. Credit scores can be as low as 300 and as high as 800. Higher scores are better. Typical home buyers will probably find their scores above 620.
FICO makes a big difference in interest rates
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.
Can I improve my FICO score?
How can you raise your FICO score? So called "credit repair" companies advertise quick fixes, but the FICO score is built on your lifelong credit history, so you can't turn it around right away. (Of course you can and should have incorrect items removed from your credit report.)
How do I find out my credit score?
In order to raise your score, you must have the reports that are used to build it, and of course, you need the score itself. Fair Isaac, the company that offered the first FICO credit score, offers FICO scores on myFICO.com. It's inexpensive to quickly get your FICO from all three reporting agencies, along with your credit report. Also available are helpful information and online tools that can help you understand how to improve your credit 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 one is quick and inexpensive.
Now that you have all the facts, you'll be a more informed consumer and you'll be better positioned to get the right mortgage for you.
Want to know more about your FICO score? Call us at 3038627760.