About the FICO Credit Score
Since we live in an automated society, it's not surprising that your ability to repay your mortgage loan comes down to a single number.
Credit reporting agencies use your history of paying all types of loans to compile this score.
Experian, TransUnion, and Equifax, the three major credit 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, the differences aren't huge; all of the agencies use the following in calculating your credit score:
- Your Credit History - How long have you had credit?
- Late Payments - Do you pay your bills on time?
- Balances on your Credit Cards - How many credit card accounts do you have, and how much do you owe on them?
- Inquiries on Your Credit - How many times have you had your credit checked for a loan?
These factors are weighted differently depending on the formula being used. The results are added up and distilled into a single number. FICO scores range from 300 to 800. Higher is always better. Typical home buyers probably find their credit scores falling above 620.
Your score affects your monthly payment
Credit 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
What can you do to raise your FICO score? Very little in the short term. Since the credit score is based on your lifelong credit history, it's very hard to change it quickly. You must appeal for the credit agency to remove any incorrect data from your credit report; this is the only "quick fix" for credit problems.
Getting your credit score
Before you can improve your FICO score, you must get your score and be sure that the reports from each credit reporting agency are correct. Fair Isaac, the company that invented the first FICO credit score, offers FICO scores on its website: myFICO.com. For a reasonable fee, you can quickly get your FICO from all three reporting agencies, along with your credit report. They also provide information and online tools that can help you understand how to improve your credit score.
You can get a federally-mandated free credit report once per year from all three agencies by visiting 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.
Armed with this info, 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? Call us at (800) 288-9693.