FICO Credit Scores: What Do They Mean?
Since our society is so computer-driven, it's probably not that surprising that your ability to repay virtually any loan comes down to a single number. Credit reporting agencies use your history of paying loans in order to create your FICO 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 the formulas vary from one agency to another, each agency uses the following to build your credit score:
- Your Credit History - How many years have you had credit?
- History of Payments - Do you pay your bills on time?
- Credit Card Balances - How many accounts? How much do you owe?
- Inquiries on Your Credit - How many times have lenders pulled your credit report for the purpose of lending you money?
These factors are weighted slightly differently depending on which formula the agency uses. Each formula produces a single number which may vary slightly from one agency to another. Credit scores range from 300 to 800. Higher is better. Most borrowers getting a mortgage loan score 620 or above.
Credit scores make a difference in your interest rate
Did you know? FICO scores affect more than your ability to get a loan. They also affect your interest rate. Lenders give lower interest rates to individuals with higher scores.
Raising your FICO score
Is it possible to improve your FICO score? Because the credit score is based on a lifetime of credit history, it's very hard to change it quickly. (Of course you can and should appeal incorrect items on your credit report.)
Getting your FICO score
In order to improve your FICO score, you've got to get 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 first FICO score, offers FICO scores on its website: myFICO.com. It's inexpensive, fast, and easy to get your credit score as well as reports from all three credit reporting agencies. They also provide information and online tools that can help you analyze what actions might have the greatest impact on your FICO score.
You can get a free credit report once a year from the three major credit reporting 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 will be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.