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 loan boils down to just one number.
The FICO score is created by credit agencies. These agencies use the payment history of your various loans: mortgages, car loans, credit cards, and others.
The three credit reporting agencies use slightly different formulas to build a credit score. The original FICO score 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, all of the agencies use the following to calculate a score:
- Your Credit History - How many years have you had credit?
- Late Payments - Do you have any payments later than 30 days?
- Your Credit Card Balances - How many credit card accounts do you hold, and how much do you owe on them?
- Requests for Credit - How many times have you had your credit checked for a loan?
Each of these factors is assigned a value and a weight. Each formula produces a single number which may vary slightly by agency. FICO scores range from 300 to 800. Higher is better. Most folks getting a mortgage loan these days score 620 or above.
Your FICO score greatly affects your monthly payment
FICO 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 FICO score?
Unfortunately, there isn't a lot you can do to immediately improve your credit score. Since the FICO score is based on your lifelong credit history, it's very difficult to change it quickly. You should appeal for the credit agency to remove any incorrect reporting from your credit report, which is the only way to quickly improve your credit score.
Know your FICO score
To raise your score, you must obtain the reports that the agencies use to build it, and of course, you need the score itself. Fair Isaac, the company that offered the original FICO credit score, sells 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 credit reporting agencies. They also provide information and online tools that help you analyze what actions might have the greatest impact on your FICO score.
You can get a federally-mandated free credit report once a year from all three agencies by visiting AnnualCreditReport.com. These reports do not include a free 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 get the right mortgage for you.
Curious about credit scores? Give us a call: 310-379-5997.