How FICO Credit Scores Are Calculated
Since we live in an computer-driven world, it should come as no surprise that your ability to repay your mortgage boils down to just one number.
This score is built by credit reporting agencies. They use the payment history from all of your loans: mortgages, car loans, credit cards, and the like.
The three agencies use slightly different formulas to build a credit score. The original FICO was developed by Fair Isaac and Company.
While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While these methods vary from one agency to another, the differences aren't huge; all of the agencies use the following to build your credit score:
- Your Credit History - Have you had credit for years, or for just a short time?
- Late Payments - Do you have a history of late payments?
- Credit Card Balances - How many credit card accounts do you have, and how much do you owe on them?
- Inquiries on Your Credit - How many times have lenders pulled your credit report for the purpose of giving you a loan?
These factors are weighted 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 better. Most home buyers in the current environment have a score above 620.
Credit scores make a difference in interest rates
Did you know? FICO scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are probably a better credit risk, and thus may qualify for a better mortgage rate.
Improving your score
What can you do to raise your FICO score? Very little in the short term. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. (Of course you must appeal incorrect items on your credit report.)
How do I find out my FICO score?
Before you can improve your score, you must know your score and be sure that the reports from each credit reporting agency are correct. Fair Isaac, the corporation that invented the original FICO score, offers FICO scores on its website: myFICO.com. It's inexpensive, fast, and easy to get your credit score along with reports from all three reporting agencies. They also provide helpful information and online tools that can help you analyze what actions might have the greatest impact on your FICO score.
You can get a federally-mandated free credit report every year from the three major agencies by visiting 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'll 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 at 310-379-5997.