How FICO Credit Scores Are Calculated
Since we live in an automated society, it's not surprising that your ability to repay your mortgage loan boils down to just one number.
The FICO score is compiled by credit agencies. These agencies use the payment history of your various loans: credit cards, mortgages, car loans and others.
Each of the three credit reporting agencies has its own formula for building your credit score. The original FICO score 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, each agency uses the following to calculate a score:
- Credit History - How many years have you had credit?
- History of Payments - Do you have a history of late payments?
- Your Credit Card Balances - How many accounts do you have, and how much do you owe on them?
- Credit Inquiries - How many times have lenders pulled your credit report for the purpose of giving you a loan?
These factors are weighted slightly differently depending on which formula the agency uses. 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 is always better. Most borrowers getting a mortgage loan these days score 620 or above.
Not just for qualifying
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.
Raising your FICO score
Unfortunately, there isn't a lot you can do to immediately improve your credit score. Since the score is entirely based on your lifelong credit history, it is hard to change it quickly. You must appeal for the credit agency to remove any incorrect reporting on your credit report, which is the only way to quickly improve your credit score.
Getting your FICO score
In order to improve your score, you've got to obtain the reports that the agencies use to build it, and of course, you need the score itself. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. For a reasonable fee, you can get your FICO score from all three agencies, along with your credit report. They also provide information and online tools that can help you improve your FICO score.
You can get a free credit report every year from all three credit reporting agencies by visiting AnnualCreditReport.com. These reports do not include a free score, but it's very inexpensive to get one at the same time.
Armed with this information, you will be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.
Curious about credit scores? Give us a call at (808) 935-0678.