FICO Credit Scores: What Do They Mean?
Since we live in an computer-driven society, it's not surprising that your ability to repay your mortgage comes down to just one number. This score is built by credit agencies. These agencies use the payment history from your various loans: credit cards, mortgages, car/boat loans and others.
All three credit 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, the differences aren't huge; each agency uses the following factors to calculate your score:
- Your Credit History - How many years have you had credit?
- History of Payments - Do you pay your bills on time?
- Balances on your Credit Cards - How many accounts? How much do you owe on your accounts?
- Inquiries on Your Credit - How many times have you had your credit checked for a loan?
Each of these factors is assigned a value and a weight. The results are added up and distilled into a single number. Credit scores range from 300 to 800. Higher is better. Most home buyers have a score above 620.
Your credit score greatly affects your interest rate
FICO scores affect more than your ability to get a loan. They also affect your interest rate. Higher scores indicate you are probably a better credit risk, and thus may qualify for a better mortgage rate.
Can I improve my credit score?
What can you do about your FICO score? Unfortunately, not much. So called "credit repair" companies advertise quick fixes, but the score is formulated from your lifetime credit history, so it's not possible to raise it significantly in the short term. You should remove any incorrect reporting from your credit report, which is the only "quick fix" for credit troubles.
Getting your FICO score
Before you can improve your score, you must obtain your score and make certain that the credit 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 reports from all three agencies. Also available are information and tools that can help you improve your FICO score.
You can get a federally-mandated free credit report every year from all three agencies at 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'll be a more informed consumer and you'll be better positioned to get the right mortgage for you.