How FICO Credit Scores Are Calculated

Since we live in an automated world, it should come as no surprise that your ability to repay your mortgage loan comes down to a single number. Credit reporting agencies use your history of paying all types of loans to create a FICO score.

All three credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a 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 the formulas vary from one agency to another, all of the agencies use the following to calculate your credit score:

  • Your Credit History - How long have you had credit?
  • Payment History - Do you have any payments later than 30 days?
  • Balances on your Credit Cards - How many credit card accounts do you have, and how much do you owe?
  • 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. Each formula produces a single number which varies slightly by agency. FICO scores can be as low as 300 and as high as 800. Higher scores are better. Most home buyers these days have a score above 620.

Not just for qualifying

FICO scores affect more than your ability to get a loan. They also affect your interest rate. 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. Because the score is based on your lifelong credit history, it's very hard to make a significant improvement in the score with quick fixes. You must, of course, appeal for the credit agency to remove any incorrect data from your credit report, which is the only way to quickly improve your credit score.

How do I find out my FICO score?

To improve your FICO score, you've got to obtain the reports that are used to build it. Of course, you need the score as well. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. It's inexpensive, fast, and easy to get your credit score along with reports from all three reporting agencies. They also provide helpful information and tools that can help you understand how to improve your FICO score.

You can get a free credit report once a year from the three major credit reporting agencies when you visit AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is fast and inexpensive.

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 your FICO score? Give us a call: 3038627760.