FICO - Your Credit Score
Because our world is so computer-driven, it should come as no surprise that your ability to repay your mortgage boils down to one number. This score is built by credit reporting agencies. They use the payment history from all of your loans: mortgages, car loans, credit cards, and the like.
TransUnion, Equifax, and Experian, the three major credit reporting agencies, each have their own proprietary formula for building your credit score. The original FICO 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, all of the agencies use the following to calculate a credit score:
- Your Credit History - How many years have you had credit?
- Late Payments - Do you pay your bills on time?
- Your Credit Card Balances - How many accounts do you hold, and 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 one number. Credit scores can be as low as 300 and as high as 800. Higher is always better. Most home buyers have a score above 620.
Not just for qualifying
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.
Can I improve my credit score?
Is there any way to improve your credit score? Despite what you hear from "credit repair" companies, the score is based on your lifelong credit history, so you can't turn it around right away. (Of course you can and should appeal incorrect items on your credit report.)
How do I find out my credit score?
To raise your FICO score, you must get the credit reports that the agencies use to build it. Of course, you need the score as well. Fair Isaac, the company that offered the original FICO credit score, offers credit scores on its website: myFICO.com. It's inexpensive to get your FICO from all three agencies, along with your credit report. Also available are helpful information and tools that help you improve your FICO score.
You can get a federally-mandated free credit report once a year from the three major agencies when you visit AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is fast and very inexpensive.
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.