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 loan boils down to a single number. All the years you've been paying your various bills: your mortgage, car payments, and credit card bills are analyzed, sliced, diced, 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. The original FICO 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, each agency uses the following to calculate your credit score:

  • Credit History - Have you had credit for many years, or for just a short time?
  • History of Payments - Do you have any payments later than 30 days?
  • Credit Card Balances - How many accounts? How much do you owe on your accounts?
  • Requests for Credit - How many times have you had your credit checked for a loan?

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 better. Typical home buyers will likely find their scores above 620.

Your FICO score affects your interest rate

Did you know? 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.

Raising your credit score

Unfortunately, there isn't a lot you can do to immediately improve your credit score. Because the FICO score is based on a lifetime of credit history, it's very difficult to significantly improve the number with quick fixes. (Of course you can and should have incorrect items removed from your credit report.)

How do I find out my credit score?

To raise your score, you've got to have the credit 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 score, sells scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score as well as credit reports from all three agencies. They also provide information and 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 the three major credit reporting agencies when you visit 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 obtain the right mortgage for you.

Want to know more about your credit score? Give us a call: 954.920.9799.

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