FICO Credit Scores: What Do They Mean?
Because we live in an automated, it's probably not that surprising that your creditworthiness comes down to one number.
All the years you've been paying your various bills: your mortgage, vehicle 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.
TransUnion, Equifax, and Experian, the three major credit agencies, each have a proprietary formula for building 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, all of the agencies use the following to build your credit score:
- Your Credit History - Have you had credit for many years, or for a short time?
- History of Payments - Have you paid more than 30 days late, and how often?
- Balances on your Credit Cards - How many accounts do you carry? How much do you owe on your accounts?
- Inquiries on Your Credit - How many times have you had your credit checked for a loan?
These factors are weighted slightly differently depending on which formula the agency uses. The result is a single number: your credit score. FICO scores can be as low as 300 and as high as 800. Higher is better. Most home buyers in the current environment have a score above 620.
Your credit score affects how much you pay in interest every month
Did you know? FICO scores affect more than your ability to get a loan. They also affect your interest rate. Lenders give lower interest rates to individuals with higher scores.
Raising your credit score
What can you do to raise your FICO score? Unfortunately, not much. Because the score is based on a lifetime of credit history, it is difficult to change it quickly. (Of course you can and should appeal incorrect items on your credit report.)
Know your FICO
Before you can improve your credit score, you have to know your score and make certain that the reports from each reporting agency are correct. Fair Isaac, the corporation that invented the first FICO score, sells scores on its website: myFICO.com. For a reasonable fee, you can get your FICO score from all three reporting agencies, along with your credit report. They also provide 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 every year from all three credit reporting 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 obtain the most favorable mortgage.
Want to know more about your credit score? Give us a call at (407) 889-4321.