How FICO Credit Scores Are Calculated

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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.This score is built by credit reporting agencies. They use the payment history of all of your loans: mortgages, car/motorcycle loans, credit cards, and the like.

All three credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a 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 these methods vary from one agency to another, the differences aren't huge; all of the agencies use the following factors to build a credit score:

  • Credit History - How long have you had credit?
  • Late Payments - 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?

These factors are weighted a little bit differently depending on the formula being used. The results are added up and distilled into a single number. Credit scores can be as low as 300 and as high as 850. Higher scores are better. Most folks who want to get a mortgage loan score 620 or above.

Your credit score affects how much you pay in interest every month

Did you know? Credit 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 raise my credit score?

Unfortunately, there isn't a lot you can do to immediately improve your credit score. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. (Of course you can and should remove incorrect data on your credit report.)

Know your FICO

To raise your score, you've got to obtain the credit reports that are used to build it. Of course, you need the score as well. 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 reporting agencies, along with your credit report. They also provide helpful information and online tools that can help you improve your credit score.

You can get a federally-mandated free credit report every year from the three major credit reporting agencies at AnnualCreditReport.com. These reports do not include a free score, but it's very inexpensive to get one at the same time.

Armed with this info, you'll be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.

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