FICO Credit Scores: What Do They Mean?
Since we live in an computer-driven society, it should come as no surprise that your ability to repay your mortgage loan comes down to just one number. Credit reporting agencies use your loan payment history to build this score.
Each of the three credit agencies has its own formula for building your 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 the formulas vary from one agency to another, the differences aren't huge; all of the agencies use the following in building your score:
- Credit History - How long have you had credit?
- Payment History - Do you have any payments later than 30 days?
- Balances on your Credit Cards - How many accounts do you hold, and how much do you owe?
- Credit Inquiries - How many times have lenders pulled your credit report for the purpose of lending you money?
These factors are assigned weights based on the formula being used. Each formula produces a single number which may vary a a little by agency. FICO scores can be as low as 300 and as high as 800. Higher is always better. Most borrowers who want to get a mortgage in the current environment have a score above 620.
Credit scores make a huge difference in interest rates
Did you know? FICO scores are used for more than just determining whether or not you qualify for a mortgage. Lenders give lower interest rates to individuals with higher scores.
Can I improve my credit score?
Is it possible to improve your credit score? So called "credit repair" companies advertise quick fixes, but the score is built on your lifetime credit history, so you can't turn it around right away. You must appeal for the credit agency to remove any incorrect reporting on your credit report, which is the only "quick fix" for credit troubles.
How do I find out my credit score?
Before you can improve your FICO score, you must get 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 to get your FICO score from all three agencies, along with your credit report. They also provide helpful information and online tools that help you improve your credit score.
You can get a federally-mandated 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 it is fast and inexpensive.
Armed with this information, you will be a more informed consumer and you'll be better positioned to get the most favorable mortgage.