FICO Credit Scores: What Do They Mean?

Since we live in an computer-driven society, it should come as no surprise that your ability to repay your mortgage boils down to a single number. Credit reporting agencies use your history of paying all types of loans in order to compile your FICO score.

Experian, TransUnion, and Equifax, the three major credit agencies, each have their own proprietary formula for building a credit score. The original FICO was developed by Fair Isaac and Company. 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, all of the agencies use the following to determine 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 credit card accounts do you have, and how much do you owe on them?
• Requests for Credit - How many times have lenders pulled your credit for the purpose of giving you a loan?

Each of these is assigned a value and a weight. Each formula produces a single number which may vary slightly from one agency to another. FICO scores can be as low as 300 and as high as 850. Higher is always better. Most home buyers have a score above 620.

Your credit score affects your monthly payment

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.

Improving your score

What can you do to raise your FICO score? Unfortunately, not much. Because the FICO score is entirely based on your lifelong credit history, it's difficult to change it quickly. You must, of course, remove any incorrect data from your credit report; this is the only "quick fix" for credit problems. Give us a call we are happy to work with you to make improvements if possible.

Know your FICO score

To raise your score, you've got to have the reports that the agencies use to build it, and of course, you need the score itself. Fair Isaac, the corporation that offered the original FICO score, sells FICO scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score as well as credit reports from all three reporting agencies. Also available are information and online tools that help you understand how to improve your FICO score.

You can get a federally-mandated free credit report once a year from the three major 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.

Armed with this information, you will be a more informed consumer and you'll be better positioned to get the most favorable mortgage.