How FICO Credit Scores Are Calculated

Since we live in an computer-driven world, it's not surprising 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 of your various loans: credit cards, mortgages, car/boat loans and others.

Experian, TransUnion, and Equifax, the three major credit reporting agencies, each have their own proprietary formula for building your credit score. Fair Isaac and Cooriginally developed this score. . 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 determine a credit score:

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

Each of these factors is assigned a value and a weight. The result is a single number: your FICO score. FICO scores range from 300 to 800. Higher is always better. Typical home buyers will probably find their scores falling above 620.

Credit scores make a big 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 FICO 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. (Of course you can and should appeal incorrect items on your credit report.)

Getting your FICO score

To raise your score, you must get the credit reports that are used to build it, and of course, you need the score itself. Fair Isaac, the corporation that invented the original FICO score, sells credit scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score along with reports from all three reporting agencies. Also available are helpful information and tools that can 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 agencies at 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.

Want to know more about credit scores? Give us a call at (407) 889-4321.

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