FICO Credit Scores: What Do They Mean?
Because we live in an automated, you're probably not surprised to hear that your ability to repay your mortgage loan boils down to one number. Credit reporting agencies use your history of paying all types of loans in order to build this score.
The three agencies use slightly different formulas to build a credit score. The original FICO model 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, the differences aren't huge; all of the agencies use the following factors to build your credit score:
- Your Credit History - Have you had credit for years, or for a short time?
- History of Payments - Do you have a history of late payments?
- Balances on your Credit Cards - How many accounts do you have, and how much do you owe on them?
- Inquiries on Your Credit - How many times have you had your credit checked for a loan?
These factors are weighted slightly differently depending on which formula the agency uses. The results are added up and distilled into a single number. FICO scores range from 300 to 800. Higher scores are better. Most home buyers likely find their FICO scores falling between 620 and 800.
Not just for qualifying
Did you know? FICO 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.
Raising your credit score
What can you do to improve your FICO score? Unfortunately, not much. So called "credit repair" companies advertise quick fixes, but the score is based on your lifetime credit history, so it's not possible to raise it significantly in the short term. You must, of course, remove any incorrect data from your credit report, which is the only way to quickly improve your credit score.
Know your FICO score
In order to improve your FICO score, you must have the credit reports that the agencies use to build it. Of course, you need the score as well. Fair Isaac, the corporation that invented the original FICO score, offers credit scores on myFICO.com. For a reasonable fee, you can get your FICO from all three reporting agencies, along with your credit report. Also available are helpful information and online tools that can help you analyze what actions might have the greatest impact on your FICO score.
You can get a federally-mandated free credit report once per year from the three major agencies at AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is fast and inexpensive.
Armed with this info, you will be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.