Scoring your Credit - How's your FICO?
Since we live in an computer-driven society, it's not surprising that your ability to repay your mortgage loan boils down to a single number. This score is built by credit agencies. They use the payment history from your various loans: mortgages, car loans, credit cards, and the like.
All three credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a 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 each of the models considers a range of data available in your credit report, the differences aren't huge; each agency uses the following factors in calculating a score:
- Your Credit History - How many years have you had credit?
- Late Payments - Do you pay your bills on time?
- Credit Card Balances - How many accounts do you hold? How much do you owe on your accounts?
- Credit Inquiries - How many times have you had your credit checked for a loan?
These factors are weighted slightly differently depending on the formula being used. Each formula produces a single number which may vary a a little from one agency to another. Credit scores range from 300 to 800. Higher is always better. Most home buyers have a score above 620.
Not just for qualifying
Did you know? Credit scores are used for more than just determining whether or not you qualify for a mortgage. Lenders give lower interest rates to individuals with higher scores.
Improving your score
What can you do to improve 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 must, of course, remove any incorrect reporting from your credit report, which is the only way to quickly improve your credit score.
How do I find out my credit score?
In order to raise your FICO score, you must obtain the reports that the agencies use to build it, and of course, you need the score itself. 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. They also provide information and online tools that help you analyze what actions might have the greatest impact on your FICO score.
You can get a free credit report once per year from the three major agencies when you visit 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 get the right mortgage for you.