How FICO Credit Scores Are Calculated

Since our society is so computer-driven, it's probably not that surprising that your ability to repay your mortgage comes down to one number. This score is created by credit agencies. These agencies use the payment history from all of your loans: mortgages, car loans, credit cards, etcetera.

All three credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a score. The original FICO model 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, the differences aren't huge; they all use the following to build a credit score:

  • Your Credit History - How long have you had credit?
  • Payment History - Do you pay your bills on time?
  • Balances on your Credit Cards - How many accounts do you hold? How much do you owe on your accounts?
  • Inquiries on Your Credit - How many times have you had your credit checked for 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. FICO scores can be as low as 300 and as high as 800. Higher is better. Typical home buyers will probably find their FICO scores falling above 620.

FICO makes a huge difference in interest rates

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.

Can I improve my FICO score?

Unfortunately, there isn't a lot you can do to immediately improve your credit score. Because the FICO score is based on your lifelong credit history, it's very difficult to change it quickly. (Of course you can and should have incorrect items removed from your credit report.)

Getting your FICO score

In order to improve your credit score, you must obtain the reports that the agencies use to build it, and of course, you need the score itself. Fair Isaac, the corporation that offered the first FICO score, sells credit scores on its website: myFICO.com. For a reasonable fee, you can quickly get your FICO score from all three reporting agencies, along with your credit report. Also available are information and online tools that help you analyze what actions might have the greatest impact on your FICO score.

You can get a federally-mandated free credit report once per year from all three credit reporting agencies by visiting AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is quick and very inexpensive.

Now that you have all the facts, you will be a more informed consumer and you'll be better positioned to get the most favorable mortgage.

Curious about your FICO score? Call us at (415) 456-7802.

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