How FICO Credit Scores Are Calculated

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

Experian, TransUnion, and Equifax, the three major credit agencies, each have a 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 the formulas vary, each agency uses the following to calculate your score:

• Credit History - How many years have you had credit?
• Payment History - Do you have any payments later than 30 days?
• Balances on your Credit Cards - How many accounts do you hold, and how much do you owe?
• Requests for Credit - How many times have lenders pulled your credit for the purpose of lending you money?

These factors are weighted differently depending on the formula being used. The result is a single number: your FICO score. Credit scores range from 300 to 800. Higher scores are better. Most folks getting a mortgage loan these days score 620 or above.

FICO makes a difference in interest rates

FICO scores affect more than your ability to get a loan. They also affect your interest rate. Higher scores indicate you are a better credit risk, and thus may qualify for a better mortgage rate.

Raising your FICO score

How can you improve your FICO score? Because the score is entirely based on your lifelong credit history, it's hard to change it quickly. You should remove any incorrect reporting from your credit report; this is the only "quick fix" for credit troubles.

Getting your credit score

Before you can improve your credit score, you must know your score and make sure that the credit reports from each agency are correct. Fair Isaac, the company that invented the original FICO score, sells credit scores on its website: myFICO.com. For a reasonable fee, you can get your FICO score from all three reporting agencies, along with your credit report. They also provide helpful information and tools that can help you improve your FICO score.

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

Armed with this information, you'll be a more informed consumer and you'll be better positioned to get the most favorable mortgage.

Curious about your FICO score? Give us a call: 305-967-7200.