FICO Credit Scores: What Do They Mean?
Since we live in an computer-driven world, it should come as no surprise that your ability to repay your mortgage comes down to just one number.
Credit reporting agencies use your payment history to build your FICO score.
Experian, TransUnion, and Equifax, the three major credit reporting agencies, each have their own proprietary formula for building a credit score. Fair Isaac and Cooriginally developed this score. .
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, 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?
- Payment History - Do you pay your bills on time?
- Balances on your Credit Cards - How many accounts do you have? How much do you owe on your accounts?
- Inquiries on Your Credit - How many times have lenders pulled your credit report for the purpose of lending you money?
Each of these factors is assigned a value and a weight. The result is one number. FICO scores can be as low as 300 and as high as 800. Higher is better. Most folks getting a mortgage score 620 or above.
Your credit score affects how much you pay in interest every month
Did you know? Credit scores are used for more than just determining whether or not you qualify for a mortgage. Lenders give lower interest rates to individuals with higher scores.
Can I improve my FICO score?
What can you do to raise your FICO score? Unfortunately, not much. Since the FICO score is entirely based on a lifetime of credit history, it's very hard to change it quickly. (Of course you can and should remove incorrect data on your credit report.)
Know your FICO score
Before you can improve your credit score, you must get your score and make certain that the reports from each agency are correct. Fair Isaac, the corporation that invented the first FICO score, sells scores on its website: myFICO.com. It's inexpensive, fast, and easy to get your credit score as well as reports from all three reporting agencies. They also provide 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 per year from the three major credit reporting agencies at AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it is quick and inexpensive.
Armed with this info, you will be a more informed consumer and you'll be better positioned to get the most favorable mortgage.
Want to know more about credit scores? Call us: (808) 935-0678.