FICO Credit Scores: What Do They Mean?
Since we live in an automated world, it's not surprising that your ability to repay your mortgage boils down to just one number. This score is created by credit reporting agencies. They use the payment history from your various loans: credit cards, mortgages, car/boat loans and others.
All three major credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a 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 each of the models considers a range of data available in your credit report, each agency uses the following to determine a score:
- Credit History - Have you had credit for many years, or for a short time?
- History of Payments - Do you pay your bills on time?
- Balances on your Credit Cards - How many credit card accounts do you hold, and how much do you owe?
- Inquiries on Your Credit - How many times have lenders pulled your credit for the purpose of giving you a loan?
These factors are assigned weights based on the formula being used. The result is one number. Credit scores range from 300 to 800. Higher is better. Typical home buyers probably find their FICO scores above 620.
Your FICO score greatly affects your monthly payment
Did you know? 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.
Improving your score
What can you do to raise your FICO score? Unfortunately, not much. Despite what you hear from "credit repair" companies, the FICO score is calculated from your lifetime credit history, so it's not possible to raise it significantly in the short term. You must, of course, appeal for the credit agency to remove any incorrect reporting on your credit report, which is the only "quick fix" for credit problems.
Know your FICO score
Before you can improve your credit score, you must obtain your score and be sure that the credit reports from each agency are correct. Fair Isaac, the company that invented the first FICO credit score, offers scores on its website: myFICO.com. It's inexpensive, fast, and easy to get your credit score as well as credit reports from all three reporting agencies. Also available are information and online tools that can help you improve your credit score.
You can get a free credit report once per year from the three major credit reporting agencies when you visit AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it is fast and inexpensive.
Now that you have all the facts, you'll be a more informed consumer and you'll be better positioned to get the most favorable mortgage.