FICO Credit Scores: What Do They Mean?
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 FICO score is built by credit agencies. These agencies use the payment history from all of your loans: mortgages, car/motorcycle/boat loans, credit cards, and the like.
All three credit agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a score. The original FICO was developed by Fair Isaac and Company.
While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While each of the models considers a range of data available in your credit report, all of the agencies use the following to calculate your score:
- Credit History - Have you had credit for years, or for a short time?
- Late Payments - Do you pay your bills on time?
- 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 lenders pulled your credit report for the purpose of giving you 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 scores are better. Most folks who want to get a mortgage these days score 620 or above.
Not just for qualifying
FICO scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are probably a better credit risk, and thus may qualify for a better mortgage rate.
Raising your credit score
Is it possible to improve your credit score? Since the score is based on your lifelong credit history, it's 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.
Know your FICO
Before you can improve your score, you must get your score and ensure 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 to get your FICO score from all three agencies, along with your credit report. They also provide information and online tools that help you improve your credit score.
You can get a free credit report every year from the three major credit reporting agencies at AnnualCreditReport.com. These reports do not include a free score, but it's very inexpensive to get one at the same time.
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 credit scores? Give us a call: 954.920.9799.