FICO Credit Scores: What Do They Mean?
Since we live in an automated world, it should come as no surprise that your ability to repay your mortgage boils down to just one number.
The FICO score is created by credit reporting agencies. These agencies use the payment history from your various loans: credit cards, mortgages, car/boat loans and others.
Experian, TransUnion, and Equifax, the three major credit reporting agencies, each have a proprietary formula for building a credit score. The original FICO was developed by Fair Isaac and Company.
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, each agency uses the following to build a score:
- Credit History - How long have you had credit?
- History of Payments - Have you paid more than 30 days late?
- Your Credit Card Balances - How many credit card accounts do you have, and how much do you owe on them?
- Credit Inquiries - How many times have lenders pulled your credit report for the purpose of lending you money?
These factors are weighted slightly differently depending on the formula being used. The result is one number. FICO scores can be as low as 300 and as high as 800. Higher is always better. Most home buyers will likely find their FICO scores falling above 620.
FICO makes a big difference in your interest rate
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.
Raising your credit 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 reporting on your credit report; this is the only way to quickly improve your credit score.
How do I find out my credit score?
Before you can improve your credit score, you must obtain your score and be sure that the credit reports from each credit reporting agency are correct. Fair Isaac, the company that offered the first FICO credit score, offers credit scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score as well as credit reports from all three credit reporting agencies. They also provide information and tools that can help you analyze what actions might have the greatest impact on your FICO score.
You can get a free credit report once a year from the three major agencies by visiting AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is fast and inexpensive.
Now that you have all the facts, you will be a more informed consumer and you'll be better positioned to get the right mortgage for you.
Want to know more about your FICO score? Call us at (860) 658-7100.