About the FICO Credit Score
Since we live in an automated world, it's not surprising that your ability to repay your mortgage boils down to just one number. The FICO score is created by credit reporting agencies. They use the payment history of your various loans: credit cards, mortgages, car/boat loans etcetera.
Each of the three credit agencies has its own 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 from one agency to another, all of the agencies use the following to build your credit score:
- Your Credit History - How many years have you had credit?
- Late Payments - Have you paid more than 30 days late, and how often?
- Your Credit Card Balances - How many accounts do you carry? How much do you owe?
- Credit Inquiries - How many times have you had your credit checked for a loan?
These factors are weighted differently depending on which formula the agency uses. Each formula produces a single number which may vary a a little from one agency to another. FICO scores can be as low as 300 and as high as 800. Higher scores are better. Most home buyers these days have a score above 620.
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 FICO score
Unfortunately, there isn't a lot you can do to immediately improve your credit score. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. You must, of course, remove any incorrect reporting on your credit report; this is the only "quick fix" for credit problems.
How do I find out my FICO score?
Before you can improve your FICO score, you must get your score and make sure that the credit reports from each credit reporting agency are correct. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. For a reasonable fee, you can quickly get your FICO score from all three reporting agencies, along with your credit report. Also available are information and online tools that 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 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.
Armed with this information, you will be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.