FICO Credit Scores: What Do They Mean?
Since we live in an computer-driven society, it should come as no surprise that your ability to repay your mortgage loan comes down to just one number. The FICO score is built by credit reporting agencies. They use the payment history of your various loans: mortgages, car/motorcycle loans, credit cards, etcetera.
The three agencies use slightly different formulas to build 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 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 credit score:
- Your Credit History - How long have you had credit?
- History of Payments - Do you pay your bills on time?
- Credit Card Balances - How many accounts do you hold? How much do you owe?
- Requests for Credit - How many times have lenders pulled your credit report for the purpose of lending you money?
These factors are assigned weights based on the formula being used. The result is a single number: your FICO score. FICO scores range from 300 to 800. Higher is always better. Most home buyers likely find their FICO scores falling between 620 and 800.
Not just for qualifying
Did you know? FICO scores affect more than your ability to get a loan. They also affect your interest rate. Higher scores indicate you are probably a better credit risk, and thus may qualify for a better mortgage rate.
Can I raise my FICO score?
Unfortunately, there isn't a lot you can do to immediately improve your credit score. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. You must remove any incorrect reporting from your credit report, which is the only "quick fix" for credit problems.
How do I find out my FICO score?
To raise your FICO score, you must obtain the credit reports that are used to build it, and of course, you need the score itself. Fair Isaac, the company that invented the original FICO credit score, sells scores on its website: myFICO.com. It's inexpensive, fast, and easy to get your credit score along with credit reports from all three agencies. They also provide information and online tools that can help you improve your credit score.
You can get a free credit report once a year from all three agencies by visiting AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it 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 right mortgage for you.