How FICO Credit Scores Are Calculated
Since our world is so computer-driven, you're probably not surprised to hear that your creditworthiness boils down to a single number. Credit reporting agencies use your loan payment history in order to compile this score.
All three major credit agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a credit score. Fair Isaac and Cooriginally developed this score. . While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While these methods vary, each agency uses the following to build a score:
- Credit History - How many years have you had credit?
- History of Payments - Have you paid more than 30 days late, and how often?
- Your 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?
Each of these is assigned a value and a weight. The result is one number. Credit scores range from 300 to 800. Higher is always better. Most borrowers who want to get a mortgage loan in the current environment have a score above 620.
FICO makes a big difference in interest rates
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
Is it possible to raise your credit score? Despite what you hear from "credit repair" companies, the score is calculated from your lifelong credit history, so it's not possible to raise it significantly in the short term. (Of course you can and should appeal incorrect items on your credit report.)
Know your FICO score
To improve your FICO score, you must obtain the credit reports that are used to build it. Of course, you need the score as well. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. For a reasonable fee, you can quickly get your FICO from all three agencies, along with your credit report. Also available are information and online tools that can help you improve your FICO score.
You can get a federally-mandated free credit report every year from the three major credit reporting agencies at AnnualCreditReport.com. While this report does not include a free credit score, the cost to "upgrade" your report to include a credit score is very reasonable.
Now that you have all the facts, you will be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.