How FICO Credit Scores Are Calculated

Since we live in an automated world, it's not surprising that your ability to repay your mortgage boils down to a single number. The years of paying your various bills: your mortgage, vehicle payments, and credit card bills are analyzed, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

Each of the three credit reporting agencies has its own formula for building your credit score. Fair Isaac and Cooriginally developed this score. . While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While the formulas vary, all of the agencies use the following to build your credit score:

• Your Credit History - Have you had credit for years, or for just a short time?
• History of Payments - Do you have any payments later than 30 days?
• Balances on your Credit Cards - How many accounts do you have, and how much do you owe?
• Inquiries on Your Credit - How many times have you had your credit checked for a loan?

These factors are assigned weights based on the formula being used. The result is one number. Credit scores can be as low as 300 and as high as 800. Higher is always better. Most people who want to get a mortgage loan in the current environment have a score above 620.

Your score greatly affects your monthly payment

Credit scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are probably a better credit risk, and thus may qualify for a better mortgage rate.

Improving your score

Unfortunately, there isn't a lot you can do to immediately improve your credit score. So called "credit repair" companies advertise quick fixes, but the score is calculated from your lifelong credit history, so you can't turn it around right away. You should, of course, appeal for the credit agency to remove any incorrect reporting from your credit report, which is the only way to quickly improve your credit score.

Getting your FICO score

Before you can improve your score, you must know your score and make certain that the reports from each agency are correct. Fair Isaac, the company that offered the original FICO score, offers 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 reporting agencies. Also available are information and online tools that can help you analyze what actions might have the greatest impact on your FICO score.

You can get a federally-mandated free credit report every year from all three credit reporting agencies when you visit 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 most favorable mortgage.

Want to know more about credit scores? Give us a call: 3038627760.