How FICO Credit Scores Are Calculated

Since we live in an automated society, it should come as no surprise that your ability to repay your mortgage boils down to a single number. This score is compiled by credit reporting agencies. They use the payment history of your various loans: credit cards, mortgages, car loans and the like.

The three agencies use slightly different formulas to build a credit score. Fair Isaac and Cooriginally developed this score. . While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While these methods vary, the differences aren't huge; each agency uses the following factors to build your credit score:

  • Credit History - Have you had credit for years, or for a short time?
  • History of Payments - Do you have a history of late payments?
  • Balances on your Credit Cards - How many accounts do you have? How much do you owe?
  • Inquiries on Your Credit - How many times have you had your credit checked for a loan?

These factors are weighted a little bit differently depending on the formula being used. Each formula produces a single number which may vary a a little by agency. FICO scores range from 300 to 800. Higher is always better. Most home buyers have a score above 620.

Credit scores make a huge difference in interest rates

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 probably a better credit risk, and thus may qualify for a better mortgage rate.

Raising your credit score

What can you do about your FICO score? Very little in the short term. 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 data from your credit report; this is the only "quick fix" for credit problems.

Know your FICO score

Before you can improve your FICO score, you have to obtain your score and be sure that the credit reports from each 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 get your FICO from all three agencies, along with your credit report. Also available are helpful information and online tools that can help you understand how to improve your credit score.

You can get a federally-mandated free credit report every year from all three credit reporting agencies by visiting 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.

Now that you have all the facts, you'll be a more informed consumer and you'll be better positioned to obtain the right mortgage for you.

Curious about credit scores? Give us a call at (281) 778-0805.

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