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 comes down to just one number. The FICO score is created by credit agencies. They use the payment history from your various loans: mortgages, car/motorcycle loans, credit cards, etcetera.

TransUnion, Equifax, and Experian, the three major credit agencies, each have their own 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 a score:

• Credit History - How long have you had credit?
• Late Payments - Do you have a history of late payments?
• Balances on your Credit Cards - How many accounts do you have? How much do you owe on your accounts?
• Credit Inquiries - How many times have lenders pulled your credit report for the purpose of lending you money?

These factors are weighted a little bit differently depending on the formula being used. The results are added up and distilled into a single number. FICO scores range from 300 to 800. Higher is always better. Most borrowers getting a mortgage have a score above 620.

Your score greatly affects your interest rate

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 credit score?

Unfortunately, there isn't a lot you can do to immediately improve your credit score. Since the credit score is based on a lifetime of credit history, it's very difficult to change it quickly. (Of course you must have incorrect items removed from your credit report.)

Getting your FICO score

Before you can improve your credit score, you have to know your score and be sure that the credit reports from each agency are correct. Fair Isaac, the company that invented the original FICO score, offers 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. Also available are 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 every year from all three agencies by visiting 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 obtain the right mortgage for you.

Want to know more about credit scores? Give us a call at 305-967-7200.