FICO Credit Scores: What Do They Mean?
Since our society is so automated, you're probably not surprised to hear that your ability to repay virtually any loan boils down to a single number. The FICO score is built by credit reporting agencies. These agencies use the payment history of your various loans: credit cards, mortgages, car/boat loans etcetera.
Equifax, TransUnion, and Experian, the three major credit agencies, each have a proprietary formula for building your credit score. The original FICO score 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 the formulas vary, the differences aren't huge; all of the agencies use the following factors to calculate your credit score:
- Credit History - Have you had credit for many years, or for just a short time?
- Payment History - Have you paid more than 30 days late?
- Credit Card Balances - How many accounts do you have, and how much do you owe on them?
- Credit Inquiries - How many times have lenders pulled your credit for the purpose of giving you a loan?
Each of these factors is assigned a value and a weight. Each formula produces a single number which may vary a a little by agency. FICO scores range from 300 to 800. Higher is better. Most people who want to get a mortgage these days have a score above 620.
FICO makes a huge difference in your interest rate
Did you know? Credit scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are a better credit risk, and thus may qualify for a better mortgage rate.
Can I improve my credit 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 score is formulated from your lifelong credit history, so it's not possible to raise it significantly in the short term. (Of course you must appeal incorrect items on your credit report.)
Getting your FICO score
In order to raise your FICO score, you've got to have the credit reports that are used to build it, and of course, you need the score itself. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. It's inexpensive to get your FICO from all three agencies, along with your credit report. They also provide information and tools that help you improve your FICO score.
You can get a 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.
Armed with this information, you'll be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.