About the FICO Credit Score
Because our society is so computer-driven, it's probably not that surprising that your ability to repay your mortgage loan comes down to a single number.
Credit reporting agencies use your loan payment history to create this score.
The three agencies use slightly different formulas to build a credit 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 these methods vary, the differences aren't huge; each agency uses the following to calculate a score:
- Your Credit History - How long have you had credit?
- History of Payments - Do you pay your bills on time?
- Balances on your Credit Cards - How many accounts do you have? How much do you owe?
- Credit Inquiries - How many times have lenders pulled your credit report for the purpose of lending you money?
These factors are assigned weights based on the formula being used. Each formula produces a single number which may vary slightly by agency. FICO scores range from 300 to 800. Higher scores are better. Most home buyers in the current environment have a score above 620.
Your FICO score greatly affects your monthly payment
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.
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. (Of course you can and should appeal incorrect items on your credit report.)
Know your FICO
To raise your FICO score, you must obtain the reports that the agencies use 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, fast, and easy to get your credit score along with reports from all three agencies. Also available are helpful information and tools that can help you understand how to improve your FICO score.
You can get a federally-mandated free credit report every year from the three major credit reporting agencies when you visit 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 information, you'll be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.
Want to know more about your credit score? Give us a call: 317-842-7744.