FICO - Your Credit Score
Since we live in a computer-driven world, you're probably not surprised to hear that your ability to repay virtually any loan comes down to a single number. This score is built by credit reporting agencies. These agencies use the payment history of your various loans: credit cards, mortgages, car loans etcetera.
Each of the three credit reporting agencies has its own formula for building your 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 the formulas vary, the differences aren't huge; all of the agencies use the following in building your score:
- Credit History - How long have you had credit?
- Payment History - Do you have a history of late payments?
- Your Credit Card Balances - How many accounts do you have? How much do you owe?
- Inquiries on Your 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 credit score. FICO scores can be as low as 300 and as high as 800. Higher is better. Typical home buyers will likely find their credit scores above 620.
Credit scores make a big difference in your interest rate
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.
Improving your score
Is there any way to raise your credit score? Despite what you hear from "credit repair" companies, the FICO score is calculated from your lifetime credit history, so you can't turn it around right away. (Of course you must remove incorrect data on your credit report.)
Know your FICO score
Before you can improve your credit score, you must get your score and make certain that the reports from each reporting agency are correct. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. It's inexpensive, fast, and easy to get your credit score as well as credit reports from all three reporting agencies. 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 federally-mandated free credit report every year from all three credit reporting agencies at AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it is quick and inexpensive.
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.