How FICO Credit Scores Are Calculated

Since we live in an automated society, it should come as no surprise that your ability to repay your mortgage boils down to just one number. This score is built by credit reporting agencies. These agencies use the payment history of all of your loans: credit cards, mortgages, car/boat loans and others.

Equifax, TransUnion, and Experian, the three major credit reporting agencies, each have their own proprietary formula for building your credit score. Fair Isaac and Co originally 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; they all use the following factors in building your credit score:

• Credit History - How many years have you had credit?
• Late Payments - Have you paid more than 30 days late?
• Balances on your Credit Cards - How many accounts do you carry? How much do you owe on your accounts?
• Requests for 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 one number. FICO scores range from 300 to 800. Higher is better. Most home buyers these days have a score above 620, but there are loans for people who have lower scores too. 

Your FICO score affects 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.

Raising your FICO score

What can you do to improve your FICO score? Unfortunately, not much. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. You should, of course, remove any incorrect reporting on your credit report, which is the only way to quickly improve your credit score.

How do I find out my FICO score?

Before you can improve your FICO score, you have to get your score and make certain that the credit reports from each credit 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 helpful information and online tools that can help you improve your FICO score.

You can get a free credit report once per year from all three credit reporting agencies by visiting 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 get the right mortgage for you.

Of course, you can always contact me, and for free, I will run a copy of your credit containing all three bureaus and all three credit scores.  Then we can discuss what to do next!