FICO Credit Scores: What Do They Mean?
Since we live in an computer-driven world, it's not surprising that your ability to repay your mortgage boils down to a single number.
Credit reporting agencies use your loan payment history to compile this score.
TransUnion, Equifax, and Experian, the three major credit reporting agencies, each have their own proprietary formula for building your credit score. The original FICO score was developed by Fair Isaac and Company.
While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While each of the models considers a range of data available in your credit report, each agency uses the following to build your credit score:
- Credit History - How many years have you had credit?
- History of Payments - Do you have a history of late payments?
- Balances on your Credit Cards - How many accounts do you hold, and how much do you owe on them?
- Requests for Credit - How many times have lenders pulled your credit for the purpose of giving you a loan?
Each of these is assigned a value and a weight. The result is one number. FICO scores range from 300 to 800. Higher is better. Most people getting a mortgage in the current environment score 620 or above.
FICO makes a huge difference in interest rates
FICO scores affect more than your ability to get a loan. They also affect your interest rate. Higher scores indicate you are 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. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. You must remove any incorrect reporting on your credit report; this is the only "quick fix" for credit problems.
Getting your credit score
Before you can improve your score, you must get your score and be sure that the credit reports from each reporting agency are correct. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. It's inexpensive to get your FICO score from all three reporting agencies, along with your credit report. Also available are helpful information and tools that can help you improve your FICO score.
You can get a free credit report every year from the three major credit reporting agencies at 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'll be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.
Want to know more about your FICO score? Call us: (512) 335-7800.