FICO Credit Scores: What Do They Mean?

Because we live in a computer-driven world, it should come as no surprise that your creditworthiness boils down to one number. Credit reporting agencies use your payment history in order to create your FICO score.

All three credit agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a credit score. The original FICO score was developed by Fair Isaac and Company. While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While these methods vary from one agency to another, the differences aren't huge; they all use the following to calculate your credit score:

  • Credit History - Have you had credit for years, or for just a short time?
  • Late Payments - Do you pay your bills on time?
  • Balances on your Credit Cards - How many accounts do you have? How much do you owe on your accounts?
  • Requests for Credit - How many times have you had your credit checked for a loan?

Each of these is assigned a value and a weight. The result is one number. Credit scores can be as low as 300 and as high as 800. Higher is better. Most home buyers have a score above 620.

Credit scores make a difference in interest rates

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

What can you do to raise your FICO score? Unfortunately, not much. Because the credit score is entirely based on your lifelong credit history, it's very hard to significantly improve the score with quick fixes. (Of course you must remove incorrect data on your credit report.)

Know your FICO score

Before you can improve your score, you have to know your score and make certain that the reports from each agency are correct. Fair Isaac, the corporation that invented the first FICO score, offers FICO scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score as well as reports from all three reporting agencies. They also provide information and tools that can help you improve your FICO score.

You can get a free credit report every year from the three major 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.

Want to know more about your credit score? Give us a call: (512) 291-6100.

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