FICO Credit Scores: What Do They Mean?

Since we live in an automated world, it's not surprising that your ability to repay your mortgage comes down to just one number. The years of paying your various bills: your mortgage, car payments, and credit card bills are analyzed, sliced, diced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

TransUnion, Equifax, and Experian, the three major credit agencies, each have a proprietary 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 these methods vary from one agency to another, all of the agencies use the following to determine your score:

• Credit History - How long have you had credit?
• History of Payments - Do you have any payments later than 30 days?
• Your Credit Card Balances - How many accounts? How much do you owe?
• Credit Inquiries - How many times have lenders pulled your credit for the purpose of giving you a loan?

These factors are weighted differently depending on the formula being used. The result is a single number: your credit score. Credit scores range from 300 to 800. Higher is better. Most home buyers these days have a score above 620.

Your credit score greatly affects your interest rate

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.

Can I improve my FICO score?

What can you do to raise your FICO score? Unfortunately, not much. Despite what you hear from "credit repair" companies, the score is formulated from your lifetime credit history, so you can't turn it around right away. (Of course you can and should have incorrect items removed from your credit report.)

Getting your credit score

Before you can improve your credit score, you have to get your score and ensure that the credit reports from each agency are correct. 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 agencies, along with your credit report. Also available are helpful information and online tools that can help you improve your FICO score.

You can get a free credit report every year from all three agencies when you visit AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is quick and inexpensive.

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

Want to know more about credit scores? Give us a call: 8102292820.