How FICO Credit Scores Are Calculated

Because we live in a computer-driven society, you're probably not surprised to hear that your creditworthiness boils down to one number. All the years you've been paying your various bills: your mortgage, car payments, and credit card bills can be analyzed, diced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

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 each of the models considers a range of data available in your credit report, all of the agencies use the following to build a credit score:

  • Your Credit History - Have you had credit for many years, or for just a short time?
  • Late Payments - Do you pay your bills on time?
  • Your Credit Card Balances - How many accounts? How much do you owe on your accounts?
  • Requests for Credit - How many times have lenders pulled your credit report for the purpose of giving you a loan?

These factors are assigned weights based on the formula being used. Each formula produces a single number which varies slightly from one agency to another. Credit scores can be as low as 300 and as high as 800. Higher is better. Most home buyers probably find their scores between 620 and 800.

Not just for qualifying

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.

Raising your credit score

Unfortunately, there isn't a lot you can do to immediately improve your credit score. Because the FICO score is entirely based on your lifelong credit history, it's very hard to significantly improve the score with quick fixes. (Of course you can and should have incorrect items removed from your credit report.)

How do I find out my credit score?

In order to raise your credit score, you must get the 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 quickly get your FICO score from all three reporting agencies, along with your credit report. They also provide information and online tools that can help you understand how to improve your FICO score.

You can get a federally-mandated free credit report once a year from the three major credit reporting agencies when you visit AnnualCreditReport.com. These reports do not include a free credit 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 your FICO score? Give us a call at (281) 778-0805.

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