FICO Credit Scores: What Do They Mean?
Since we live in an automated, it should come as no surprise that your creditworthiness boils down to a single number. All the years you've been paying your various bills: your mortgage, car payments, and credit card bills can be analyzed, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.
The three credit reporting agencies use slightly different formulas to build a credit score. Fair Isaac and Cooriginally developed this score. . While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "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 - How long have you had credit?
- Payment History - Do you pay your bills on time?
- Your Credit Card Balances - How many accounts? How much do you owe on your accounts?
- Credit Inquiries - How many times have lenders pulled your credit for the purpose of lending you money?
Each of these factors is assigned a value and a weight. Each formula produces a single number which varies slightly by agency. Credit scores range from 300 to 800. Higher is better. Most home buyers have a score above 620.
Not just for qualifying
FICO scores affect more than your ability to get a loan. They also affect your interest rate. Higher scores indicate you are a better credit risk, and thus may qualify for a better mortgage rate.
Raising your credit score
Unfortunately, there isn't a lot you can do to immediately improve your credit score. Since the credit score is based on your lifelong credit history, it is difficult to change it quickly. (Of course you must remove incorrect data on your credit report.)
Know your FICO score
To improve your score, you've got to get 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. For a reasonable fee, you can get your FICO score from all three agencies, along with your credit report. Also available are information and tools that help you improve your FICO score.
You can get a federally-mandated free credit report once per year from all three agencies by visiting AnnualCreditReport.com. While this report does not include a free credit score, the cost to "upgrade" your report to include a credit score is very reasonable.
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.