FICO Credit Scores: What Do They Mean?
Because we live in an automated, it's probably not that surprising that your ability to repay virtually any loan boils down to a single number. All the years you've been paying your various bills: your mortgage, car payments, and credit card bills can be analyzed, 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. The original FICO model 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, all of the agencies use the following to determine your score:
- Your Credit History - How long have you had credit?
- Late Payments - Have you paid more than 30 days late, and how often?
- 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 is assigned a value and a weight. The result is one number. FICO scores range from 300 to 800. Higher is better. Most home buyers likely find their credit scores above 620.
Your FICO score greatly affects your monthly payment
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 raise my credit score?
How can you raise your FICO score? Since the FICO score is based on your lifelong credit history, it's very difficult to change it quickly. (Of course you can and should appeal incorrect items on your credit report.)
Getting your credit score
Before you can improve your credit score, you must know your score and make certain that the credit reports from each credit reporting agency are correct. Fair Isaac, the company that invented the original FICO score, sells scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score along with reports from all three credit reporting agencies. 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 federally-mandated free credit report every year from all three 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.
Armed with this information, you will be a more informed consumer and you'll be better positioned to get the most favorable mortgage.