You Credit Score: How's Your FICO?
Since we live in a computer-driven society, you're probably not surprised to hear that your ability to repay your mortgage boils down to one number.
The FICO score is built by credit reporting agencies. They use the payment history from your various loans: mortgages, car/motorcycle loans, credit cards, and others.
Equifax, TransUnion, and Experian, the three major credit agencies, each have a proprietary formula for building 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 these methods vary, all of the agencies use the following to build a credit score:
- Credit History - How many years have you had credit?
- Payment History - Have you paid more than 30 days late, and how often?
- Balances on your Credit Cards - How many accounts do you have, and how much do you owe?
- Credit Inquiries - How many times have lenders pulled your credit report for the purpose of giving you a loan?
Each of these factors is assigned a value and a weight. The result is a single number: your FICO score. Credit scores range from 300 to 800. Higher is better. Most people getting a mortgage score 620 or above.
Credit scores make a huge difference in 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 a better credit risk, and thus may qualify for a better mortgage rate.
Raising your FICO score
Unfortunately, there isn't a lot you can do to immediately improve your credit score. Despite what you hear from "credit repair" companies, the FICO score is built on your lifelong credit history, so it's not possible to raise it significantly in the short term. You should, of course, remove any incorrect data on your credit report; this is really the only way to quickly improve your credit score.
Getting your credit score
Before you can improve your credit score, you must obtain your score and be sure that the reports from each credit reporting agency are correct. Fair Isaac, the corporation that invented the original FICO score, offers credit scores on its website: myFICO.com. For a reasonable fee, you can get your FICO score from all three reporting agencies, along with your credit report. Also available are helpful information and online tools that help you understand how to improve your FICO score.
You can get a federally-mandated free credit report every year from the three major credit reporting agencies when you visit AnnualCreditReport.com. While this report does not include a free credit score, the cost to "upgrade" your report to include a credit score is very reasonable.
Now that you have all the facts, you will be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.
Want to know more about credit scores? Give us a call: (860) 658-7100.