Scoring your Credit - How's your FICO?
Since we live in an automated world, it should come as no surprise that your ability to repay your mortgage loan comes down to a single number.
This score is compiled by credit agencies. These agencies use the payment history from all of your loans: credit cards, mortgages, car/boat loans and others.
All three credit agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a 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 the formulas vary, all of the agencies use the following to build your credit score:
- Your Credit History - How long have you had credit?
- Payment History - Have you paid more than 30 days late?
- Balances on your Credit Cards - How many accounts do you hold? How much do you owe?
- Credit Inquiries - How many times have lenders pulled your credit report for the purpose of lending you money?
These factors are weighted differently depending on the formula being used. Each formula produces a single number which varies slightly from one agency to another. FICO scores can be as low as 300 and as high as 800. Higher is always better. Most home buyers in the current environment have a score above 620.
Your FICO score affects how much you pay in interest every month
Did you know? 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.
Can I improve my FICO score?
What can you do about your FICO score? Very little in the short term. Despite what you hear from "credit repair" companies, the FICO score is calculated from your lifetime credit history, so it's not possible to raise it significantly in the short term. (Of course you must remove incorrect data on your credit report.)
Getting your credit score
Before you can improve your score, you must obtain your score and make certain that the reports from each 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 agencies. Also available are 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 every year from the three major agencies when you visit AnnualCreditReport.com. While this report does not include a free credit score, the cost to "upgrade" your report to include a credit score is very reasonable.
Now that you have all the facts, 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 your FICO score? Call us at (512) 291-6100.