FICO Credit Scores: What Do They Mean?

Since our world is so computer-driven, it's probably not that surprising that your ability to repay virtually any loan comes down to a single number. Credit reporting agencies use your history of paying loans to create this score.

Experian, TransUnion, and Equifax, the three major credit agencies, each have a proprietary formula for building a credit score. The original FICO model 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, the differences aren't huge; each agency uses the following in building your score:

  • Your Credit History - How long have you had credit?
  • Payment History - Have you paid more than 30 days late, and how often?
  • Balances on your Credit Cards - How many accounts do you hold? 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. The result is a single number: your credit score. Credit scores can be as low as 300 and as high as 800. Higher is always better. Most home buyers in the current environment have a score above 620.

Credit scores make a difference in your interest rate

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

Raising your FICO score

What can you do about your FICO score? Unfortunately, not much. Since the credit score is based on a lifetime of credit history, it's hard to make a significant change in the number with quick fixes. (Of course you must have incorrect items removed from your credit report.)

How do I find out my FICO score?

Before you can improve your score, you have to obtain your score and ensure that the reports from each agency are correct. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. For a reasonable fee, you can quickly get your FICO from all three reporting agencies, along with your credit report. Also available are helpful information and tools that help you improve your FICO score.

You can get a free credit report every year from the three major credit reporting 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.

Now that you have all the facts, you will be a more informed consumer and you'll be better positioned to get the right mortgage for you.

Curious about credit scores? Call us at (808) 935-0678.

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