How FICO Credit Scores Are Calculated

Since our world is so automated, you're probably not surprised to hear that your ability to repay virtually any loan boils down to a single number. Credit reporting agencies use your history of paying loans to compile your FICO score.

All three credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at 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 each of the models considers a range of data available in your credit report, the differences aren't huge; all of the agencies use the following factors in calculating a credit score:

  • Credit History - How long have you had credit?
  • History of Payments - Do you pay your bills on time?
  • Your Credit Card Balances - How many accounts do you hold? How much do you owe?
  • Inquiries on Your 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 results are added up and distilled into a single number. Credit scores range from 300 to 800. Higher is always better. Most people who want to get a mortgage 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. Lenders give lower interest rates to individuals with higher scores.

Raising your FICO score

Is it possible to improve your FICO score? Despite what you hear from "credit repair" companies, the FICO score is built on your lifetime credit history, so it's not possible to raise it significantly in the short term. You must appeal for the credit agency to remove any incorrect data from your credit report, which is the only way to quickly improve your credit score.

How do I find out my credit score?

In order to raise your credit score, you must get the credit reports that are used to build it. Of course, you need the score as well. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. It's inexpensive to get your FICO score from all three reporting agencies, along with your credit report. Also available are information and tools that help you understand how to improve your credit score.

You can get a free credit report once a year from the three major credit reporting agencies by visiting AnnualCreditReport.com. These reports do not include a free score, but it's very inexpensive to get one at the same time.

Armed with this info, you'll be a more informed consumer and you'll be better positioned to get the right mortgage for you.

Want to know more about credit scores? Give us a call at (281) 778-0805.

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