How FICO Credit Scores Are Calculated

Because we live in a computer-driven world, you're probably not surprised to hear that your creditworthiness boils down to one number. All the years you've been paying your various bills: your mortgage, vehicle payments, and credit card bills can be analyzed, sliced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

The three credit reporting 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 the formulas vary from one agency to another, the differences aren't huge; each agency uses the following to build a credit score:

  • Credit History - How many years have you had credit?
  • Payment History - Do you pay your bills on time?
  • 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 assigned weights based on the formula being used. The results are added up and distilled into a single number. Credit scores range from 300 to 800. Higher is always better. Most people getting a mortgage loan in the current environment score 620 or above.

Credit scores make a huge difference in your interest rate

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.

Can I improve my credit score?

What can you do about your FICO score? Unfortunately, not much. Since the FICO score is based on your lifelong credit history, it's very difficult to make a significant change in the score with quick fixes. (Of course you must have incorrect items removed from your credit report.)

Know your FICO score

Before you can improve your score, you have to know your score and make sure that the reports from each credit reporting agency are correct. Fair Isaac, the company that invented the first FICO credit score, offers scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score along with credit reports from all three agencies. Also available are information and tools that help you improve your FICO score.

You can get a federally-mandated free credit report once per year from all three agencies at AnnualCreditReport.com. These reports do not include a free credit score, but it's very inexpensive to get one at the same time.

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.

Curious about your FICO score? Give us a call: 310-379-5997.

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