How FICO Credit Scores Are Calculated

Since we live in an computer-driven world, it's not surprising that your ability to repay your mortgage loan comes down to just one number. The FICO score is built by credit agencies. They use the payment history of all of your loans: credit cards, mortgages, car/boat loans and others.

All three major credit agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a score. The original FICO model 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, the differences aren't huge; all of the agencies use the following factors to calculate a score:

• Your Credit History - How many years have you had credit?
• Late Payments - Do you have a history of late payments?
• Balances on your Credit Cards - How many accounts? How much do you owe?
• Credit Inquiries - How many times have you had your credit checked for a loan?

These factors are assigned weights based on the formula being used. Each formula produces a single number which varies slightly by agency. FICO scores can be as low as 300 and as high as 800. Higher is better. Most home buyers have a score above 620.

Your score affects how much you pay in interest every month

FICO scores affect more than your ability to get a loan. They also affect your interest rate. Higher scores indicate you are probably a better credit risk, and thus may qualify for a better mortgage rate.

Raising your FICO score

Is there any way to improve your credit score? So called "credit repair" companies advertise quick fixes, but the FICO score is calculated from your lifelong credit history, so you can't turn it around right away. You should, of course, remove any incorrect data from your credit report; this is the only "quick fix" for credit problems.

How do I find out my credit score?

Before you can improve your credit score, you must know your score and make sure that the reports from each 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 along with credit reports from all three reporting agencies. They also provide information and online tools that can help you analyze what actions might have the greatest impact on your FICO score.

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

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

Want to know more about credit scores? Call us at 5122916100.