How FICO Credit Scores Are Calculated

Since our society is so computer-driven, you're probably not surprised to hear that your ability to repay your mortgage loan boils down to one number. All the years you've been paying your various bills: your mortgage, vehicle payments, and credit card bills can be analyzed, diced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

All three major credit agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a score. Fair Isaac and Cooriginally developed this score. . 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, all of the agencies use the following to determine your score:

• Credit History - Have you had credit for many years, or for just a short time?
• History of Payments - Do you have a history of late payments?
• Your Credit Card Balances - How many credit card accounts do you hold, and how much do you owe?
• Inquiries on Your Credit - How many times have you had your credit checked for a loan?

These factors are weighted a little bit differently depending on which formula the agency uses. The result is one number. FICO scores range from 300 to 800. Higher is better. Most home buyers these days have a score above 620.

Credit scores make 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.

Raising your FICO score

What can you do to improve your FICO score? Very little in the short term. Because the FICO score is based on your lifelong credit history, it's very hard to significantly improve the score with quick fixes. You should, of course, appeal for the credit agency to remove any incorrect data on your credit report, which is the only "quick fix" for credit problems.

How do I find out my credit score?

Before you can improve your score, you must obtain 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 credit reporting agencies. They also provide helpful information and tools that can help you improve 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. 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 get the right mortgage for you.

Want to know more about credit scores? Call us: (407) 898-7559.