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 comes down to just one number. The years of paying your various bills: your mortgage, vehicle payments, and credit card bills are analyzed, sliced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

Each of the three credit reporting agencies has its own formula for building your 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, each agency uses the following to determine your score:

• Your Credit History - How long have you had credit?
• History of Payments - Do you have a history of late payments?
• Credit Card Balances - How many accounts do you have, and how much do you owe?
• Requests for Credit - How many times have lenders pulled your credit report for the purpose of lending you money?

These factors are weighted slightly differently depending on the formula being used. The result is a single number: your credit score. Credit scores can be as low as 300 and as high as 800. Higher is always better. Most home buyers likely find their credit scores falling between 620 and 800.

FICO makes a huge difference in interest rates

FICO scores affect more than your ability to get a loan. They also affect your interest rate. Higher scores indicate you are a better credit risk, and thus may qualify for a better mortgage rate.

Raising your credit score

Unfortunately, there isn't a lot you can do to immediately improve your credit score. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. You should remove any incorrect reporting from your credit report; this is really the only way to quickly improve your credit score.

Know your FICO

Before you can improve your FICO score, you have to obtain your score and make sure that the credit reports from each reporting agency are correct. Fair Isaac, the company that invented the original FICO score, sells scores on its website: myFICO.com. It's inexpensive, fast, and easy to get your credit score along with credit reports from all three agencies. Also available are helpful information and online tools that help you analyze what actions might have the greatest impact on your FICO score.

You can get a free credit report once a year from the three major credit reporting agencies when you visit AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it is quick and very inexpensive.

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.

Curious about your FICO score? Call us at 9043423622.