How FICO Credit Scores Are Calculated
Since our society is so automated, you're probably not surprised to hear that your creditworthiness boils down to a single number.
Credit reporting agencies use your history of paying all types of loans to create your FICO score.
The three credit reporting agencies use slightly different formulas to build a 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 these methods vary from one agency to another, 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?
- Late Payments - Have you paid more than 30 days late?
- Credit Card Balances - How many accounts do you hold, and how much do you owe on them?
- Requests for 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 is better. Most home buyers in the current environment have a score above 620.
Not just for qualifying
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 FICO score
Unfortunately, there isn't a lot you can do to immediately improve your credit score. Because the credit score is based on your lifelong credit history, it's very hard to change it quickly. You must remove any incorrect reporting on your credit report; this is really the only "quick fix" for credit problems.
Getting your FICO score
Before you can improve your credit score, you have to know your score and make sure that the reports from each reporting agency are correct. Fair Isaac, the company that offered the first FICO credit score, offers scores on its website: myFICO.com. For a reasonable fee, you can get your FICO score from all three agencies, along with your credit report. 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 federally-mandated free credit report once a year from all three 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.
Armed with this information, 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 at 954.920.9799.