FICO Credit Scores: What Do They Mean?
Since our world is so computer-driven, it should come as no surprise that your creditworthiness boils down to a single number.
The years of paying your various bills: your mortgage, car payments, and credit card bills are analyzed, sliced, diced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.
All three major credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a credit score. Fair Isaac and Cooriginally developed this score. .
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, each agency uses the following to calculate your score:
- Your Credit History - How many years have you had credit?
- History of Payments - Do you have any payments later than 30 days?
- Balances on your Credit Cards - How many credit card accounts do you have, 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 assigned weights based on the formula being used. The result is a single number: your credit score. Credit scores range from 300 to 800. Higher scores are better. Most home buyers have a score above 620.
FICO makes a huge difference in interest rates
Credit scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are a better credit risk, and thus may qualify for a better mortgage rate.
Improving your score
What can you do to improve your FICO score? Unfortunately, not much. Since the score is entirely based on a lifetime of credit history, it is difficult to significantly improve the score with quick fixes. You must, of course, remove any incorrect reporting from 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 FICO score, you have to know your score and ensure 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. For a reasonable fee, you can quickly get your FICO from all three reporting agencies, along with your credit report. They also provide information and tools that can help you improve your FICO score.
You can get a federally-mandated free credit report once per year from all three credit reporting agencies by visiting AnnualCreditReport.com. These reports do not include a free score, but it's very inexpensive to get one at the same time.
Now that you have all the facts, 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 (813) 200-7931.