How's your FICO Score?
Since our society is so automated, it's probably not that surprising that your ability to repay virtually any loan boils down to a single number. This score is compiled by credit agencies. These agencies use the payment history from your various loans: mortgages, car loans, credit cards, and the like.
All three credit agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a 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 the formulas vary, each agency uses the following to build your score:
- Credit History - How many years have you had credit?
- History of Payments - Have you paid more than 30 days late?
- Your Credit Card Balances - How many accounts do you hold? How much do you owe?
- Requests for Credit - How many times have lenders pulled your credit report for the purpose of giving you a loan?
Each of these is assigned a value and a weight. The result is a single number: your FICO score. Credit scores can be as low as 300 and as high as 800. Higher is always better. Most people getting a mortgage have a score above 620.
Not just for qualifying
Did you know? 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
What can you do to raise your FICO score? Very little in the short term. Despite what you hear from "credit repair" companies, the FICO score is formulated from your lifetime credit history, so it's not possible to raise it significantly in the short term. (Of course you can and should appeal incorrect items on your credit report.)
Know your FICO
Before you can improve your credit score, you have to know your score and make certain that the 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 to quickly get your FICO from all three reporting agencies, along with your credit report. They also provide 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 once a 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.
Armed with this info, you will be a more informed consumer and you'll be better positioned to obtain the right mortgage for you.