FICO Credit Scores: What Do They Mean?

Because our world is so automated, it should come as no surprise that your ability to repay your mortgage loan comes down to one number. This score is built by credit agencies. These agencies use the payment history of your various loans: credit cards, mortgages, car loans and the like.

All three credit agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a 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, each agency uses the following to build your score:

• Credit History - How many years have you had credit?
• Payment History - Do you pay your bills on time?
• Your Credit Card Balances - How many accounts do you have, and how much do you owe on them?
• Inquiries on Your Credit - How many times have lenders pulled your credit for the purpose of lending you money?

Each of these is assigned a value and a weight. The result is one number. Credit scores can be as low as 300 and as high as 800. Higher is always better. Most borrowers who want to get a mortgage loan in the current environment score 620 or above.

Your FICO score affects your interest rate

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.

Improving your 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. (Of course you can and should appeal incorrect items on your credit report.)

Getting your credit score

Before you can improve your score, you must obtain your score and make sure 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, fast, and easy to get your credit score along with credit reports from all three reporting agencies. Also available are helpful information and tools that help you analyze what actions might have the greatest impact on your FICO score.

You can get a federally-mandated free credit report once a year from all three 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.

Now that you have all the facts, you will be a more informed consumer and you'll be better positioned to get the most favorable mortgage.

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