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 loan comes down to just one number.
This score is built by credit agencies. They use the payment history of all of your loans: credit cards, mortgages, car/boat loans and others.
Each of the three credit reporting agencies has its own formula for building your credit score. Fair Isaac and Cooriginally developed this score. .
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, all of the agencies use the following to determine your credit score:
- Credit History - How long have you had credit?
- History of Payments - Do you have any payments later than 30 days?
- Credit Card Balances - How many accounts? How much do you owe on your accounts?
- Inquiries on Your Credit - How many times have lenders pulled your credit for the purpose of giving you a loan?
Each of these factors is assigned a value and a weight. Each formula produces a single number which may vary slightly from one agency to another. FICO scores range from 300 to 800. Higher scores are better. Typical home buyers probably find their credit scores between 620 and 800.
FICO makes a big difference in interest rates
Did you know? FICO scores affect more than your ability to get a loan. They also affect your interest rate. Lenders give lower interest rates to individuals with higher scores.
Improving your 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 should, of course, remove any incorrect reporting from your credit report; this is the only way to quickly improve your credit score.
Know your FICO
To improve your FICO score, you must obtain the reports that are used to build it, and of course, you need the score itself. Fair Isaac, the corporation that invented the first FICO score, sells credit scores on its website: myFICO.com. It's inexpensive, fast, and easy to get your credit score along with reports from all three credit reporting agencies. They also provide helpful information and online tools that can help you improve your FICO score.
You can get a free credit report every year from all three credit reporting agencies when you visit 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 get the right mortgage for you.
Curious about your credit score? Give us a call: (415) 456-7802.