FICO Credit Scores: What Do They Mean?

Because our world is so automated, it's probably not that surprising that your ability to repay virtually any loan comes down to a single number. The FICO score is compiled by credit agencies. They use the payment history from your various loans: credit cards, mortgages, car/boat loans and the like.

TransUnion, Equifax, and Experian, the three major credit agencies, each have a proprietary formula for building 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, the differences aren't huge; all of the agencies use the following in calculating your score:

  • Your Credit History - Have you had credit for many years, or for a short time?
  • Late Payments - Have you paid more than 30 days late?
  • Your Credit Card Balances - How many accounts? How much do you owe on your accounts?
  • Inquiries on Your Credit - How many times have lenders pulled your credit for the purpose of lending you money?

These factors are weighted differently depending on the formula being used. The result is a single number: your credit score. FICO scores range from 300 to 800. Higher scores are better. Most people who want to get a mortgage loan these days have a score above 620.

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

Is there any way to raise your credit score? Since the credit score is based on a lifetime of credit history, it is hard to make a significant improvement in the number with quick fixes. (Of course you must remove incorrect data on your credit report.)

How do I find out my credit score?

In order to improve your credit score, you must have the credit reports that are used to build it, and of course, you need the score itself. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. For a reasonable fee, you can quickly get your FICO score from all three agencies, along with your credit report. Also available are helpful information and tools that help you understand how to improve your FICO score.

You can get a free credit report once a year from the three major credit reporting agencies by visiting AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it is fast and very inexpensive.

Armed with this info, you will be a more informed consumer and you'll be better positioned to obtain the right mortgage for you.

Want to know more about credit scores? Call us: (512) 291-6100.

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