FICO Credit Scores: What Do They Mean?
Since our world is so automated, you're probably not surprised to hear that your creditworthiness boils down to one number.
All the years you've been paying your various bills: your mortgage, car payments, and credit card bills are analyzed, sliced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.
The three reporting agencies use slightly different formulas to build a credit 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 these methods vary, each agency uses the following to build a credit score:
- Credit History - Have you had credit for years, or for a short time?
- Late Payments - Have you paid more than 30 days late, and how often?
- Balances on your Credit Cards - How many accounts do you carry? How much do you owe?
- Requests for Credit - How many times have you had your credit checked for a loan?
Each of these factors is assigned a value and a weight. Each formula produces a single number which varies slightly by agency. FICO scores range from 300 to 800. Higher is always better. Most home buyers in the current environment have a score above 620.
FICO makes a difference in your interest rate
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.
Improving your score
What can you do to raise your FICO score? Unfortunately, not much. Since the FICO score is based on your lifelong credit history, it is hard to significantly improve the number with quick fixes. You should, of course, remove any incorrect data from your credit report; this is really the only "quick fix" for credit problems.
Know your FICO score
To raise your credit score, you've got to have the reports that are used to build it. Of course, you need the score as well. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. For a reasonable fee, you can get your FICO from all three reporting agencies, along with your credit report. Also available are information and tools that help you analyze what actions might have the greatest impact on your FICO score.
You can get a federally-mandated free credit report once per 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.
Armed with this information, you'll be a more informed consumer and you'll be better positioned to get the most favorable mortgage.
Curious about your FICO score? Give us a call: (407) 898-7559.