FICO Credit Scores: What Do They Mean?

Since we live in an computer-driven world, it should come as no surprise that your ability to repay your mortgage loan comes down to just one number. All the years you've been paying your various bills: your mortgage, vehicle 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 credit reporting agencies use slightly different formulas to build 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 these methods vary, each agency uses the following to calculate a credit score:

• Your Credit History - Have you had credit for years, or for just a short time?
• Late Payments - Do you have a history of late payments?
• Balances on your Credit Cards - How many credit card accounts do you have, and how much do you owe on them?
• Inquiries on Your Credit - How many times have lenders pulled your credit report for the purpose of giving you a loan?

These factors are assigned weights based on the formula being used. The result is one number. Credit scores can be as low as 300 and as high as 800. Higher scores are better. Most folks who want to get a mortgage these days have a score above 620.

Not just for qualifying

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 credit score

What can you do about your FICO score? Unfortunately, not much. Since the FICO score is based on your lifelong credit history, it's very hard to change it quickly. You must appeal for the credit agency to remove any incorrect reporting from your credit report, which is the only "quick fix" for credit problems.

Know your FICO score

To improve your FICO score, you've got to obtain the reports that are used to build it, and of course, you need the score itself. Fair Isaac, the corporation that invented the original FICO credit score, offers scores on its website: myFICO.com. For a reasonable fee, you can quickly get your FICO score from all three agencies, along with your credit report. They also provide helpful information and online tools that help you analyze what actions might have the greatest impact on your FICO score.

You can get a free credit report every year from the three major credit reporting agencies by visiting 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 get the most favorable mortgage.

Curious about credit scores? Give us a call: 8132007931.