How FICO Credit Scores Are Calculated

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Since we live in a computer-driven world, you're probably not surprised to hear that your ability to repay your mortgage boils down to one number. The FICO score is compiled by credit reporting agencies. They use the payment history from your various loans: mortgages, car loans, credit cards, and the like.

Experian, TransUnion, and Equifax, the three major credit agencies, each have a proprietary formula for building your credit score. The original FICO 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 each of the models considers a range of data available in your credit report, each agency uses the following to determine a credit score:

  • Your Credit History - Have you had credit for years, or for a short time?
  • Late Payments - Do you have a history of late payments?
  • Balances on your Credit Cards - How many accounts? 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. The result is a single number: your FICO score. FICO scores range from 300 to 850. Higher is better. Most folks getting a mortgage these days score 620 or above.

Not just for qualifying

Did you know? FICO scores affect more than your ability to get a loan. They also affect your interest rate. Higher scores indicate you are probably a better credit risk, and thus may qualify for a better mortgage rate.

Can I raise my FICO score?

Is it possible to improve your credit score? Some companies promise quick fixes, but they can't do anything different than what you can do — for free. You must appeal for the credit agency to remove any incorrect reporting on your credit report, which is the only "quick fix" for credit problems.

Know your FICO

Before you can improve your credit score, you have to know your score and make sure that the credit reports from each agency are correct. Fair Isaac, the corporation that invented 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 reports from all three agencies. Also available are information and online tools that can help you understand how to improve your credit score.

You can get a federally-mandated free credit report once per year from all three credit reporting agencies by visiting 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'll be a more informed consumer and you'll be better positioned to obtain the right mortgage for you.

Want to know more about your FICO score? Give us a call at 817-616-3651.

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