How FICO Credit Scores Are Calculated
Since we live in an automated, it should come as no surprise that your creditworthiness boils down to one number. Credit reporting agencies use your history of paying loans in order to build this score.
TransUnion, Equifax, and Experian, the three major credit agencies, each have their own proprietary formula for building 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 your credit score:
- Your Credit History - How many years have you had credit?
- Payment History - Have you paid more than 30 days late, and how often?
- Credit Card Balances - How many accounts? How much do you owe?
- Requests for Credit - How many times have lenders pulled your credit report for the purpose of giving you a loan?
These factors are weighted slightly differently depending on which formula the agency uses. The result is one number. FICO scores range from 300 to 800. Higher scores are better. Typical home buyers will likely find their credit scores falling above 620.
Credit scores make a big difference in your interest rate
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
Is there any way to improve your FICO score? So called "credit repair" companies advertise quick fixes, but the score is formulated from your lifelong credit history, so it's not possible to raise it significantly in the short term. (Of course you must appeal incorrect items on your credit report.)
How do I find out my FICO score?
Before you can improve your score, you must know your score and make sure that the credit reports from each agency are correct. Fair Isaac, the corporation that offered the original FICO credit score, sells credit scores on its website: myFICO.com. It's inexpensive to quickly get your FICO from all three reporting agencies, along with your credit report. Also available are helpful information and online tools that can help you improve your FICO score.
You can get a free credit report once per year from the three major agencies when you visit AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it is quick and very inexpensive.
Armed with this information, you'll be a more informed consumer and you'll be better positioned to get the most favorable mortgage.