FICO Credit Scores: What Do They Mean?

Since we live in an computer-driven world, it should come as no surprise that your ability to repay your mortgage loan comes down to a single number. The years of paying your various bills: your mortgage, vehicle payments, and credit card bills are analyzed, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

Equifax, TransUnion, and Experian, the three major credit agencies, each have their own proprietary formula for building a 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, the differences aren't huge; all of the agencies use the following factors in building a credit score:

• Your Credit History - How many years have you had credit?
• Payment History - Do you have a history of late payments?
• Credit Card Balances - How many accounts do you hold, and how much do you owe?
• Credit Inquiries - How many times have lenders pulled your credit for the purpose of lending you money?

Each of these factors is assigned a value and a weight. The result is a single number: your credit score. FICO scores range from 300 to 800. Higher scores are better. Most folks getting a mortgage loan in the current environment have a score above 620.

FICO makes a huge difference in interest rates

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

What can you do to raise 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, which is the only way to quickly improve your credit score.

Getting your FICO score

Before you can improve your credit score, you must get your score and make certain that the credit reports from each agency are correct. Fair Isaac, the company that invented the first FICO score, sells scores on its website: myFICO.com. It's inexpensive, fast, and easy to get your credit score as well as credit reports from all three agencies. Also available are helpful information and online tools that help you understand how to improve your credit score.

You can get a federally-mandated free credit report once a year from the three major credit reporting agencies by visiting AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it is fast and inexpensive.

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 8102292820.