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 a single number. The FICO score is created by credit reporting agencies. These agencies use the payment history from your various loans: credit cards, mortgages, car/boat loans etcetera.

Each of the three credit reporting agencies has its own formula for building your credit score. The original FICO 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 to calculate your score:

  • Your Credit History - Have you had credit for many years, or for a short time?
  • Late Payments - Have you paid more than 30 days late?
  • Balances on your Credit Cards - How many accounts? How much do you owe?
  • Credit Inquiries - How many times have lenders pulled your credit report for the purpose of lending you money?

Each of these is assigned a value and a weight. The result is one number. FICO scores range from 300 to 800. Higher scores are better. Most home buyers have a score above 620.

Not just for qualifying

Did you know? Credit scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are probably a better credit risk, and thus may qualify for a better mortgage rate.

Improving your score

Unfortunately, there isn't a lot you can do to immediately improve your credit score. Because the credit score is based on a lifetime of credit history, it is difficult to make a significant improvement in the score with quick fixes. You should, of course, appeal for the credit agency to remove any incorrect reporting from your credit report; this is the only "quick fix" for credit problems.

Getting your credit score

To improve your credit score, you've got to obtain the credit reports that are used to build it, and of course, you need the score itself. 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 as well as credit reports from all three reporting agencies. 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 free credit report once per year from the three major agencies at AnnualCreditReport.com. These reports do not include a free credit score, but it's very inexpensive to get one at the same time.

Now that you have all the facts, you'll 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: (512) 335-7800.

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