How's your FICO Score?
Since our society is so automated, it should come as no surprise that your ability to repay your mortgage loan boils down to a single number. This score is built by credit reporting agencies. These agencies use the payment history from all of your loans: credit cards, mortgages, car loans and the like.
Each of the three credit reporting agencies has its own formula for building your 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 these methods vary, the differences aren't huge; each agency uses the following factors to calculate a score:
- Your Credit History - How long have you had credit?
- Payment History - Have you paid more than 30 days late?
- Balances on your Credit Cards - How many accounts do you hold? How much do you owe on your accounts?
- Requests for Credit - How many times have lenders pulled your credit report for the purpose of giving you a loan?
Each of these factors is assigned a value and a weight. The results are added up and distilled into a single number. FICO scores range from 300 to 800. Higher is better. Most people who want to get a mortgage these days 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 probably a better credit risk, and thus may qualify for a better mortgage rate.
Raising your credit score
Is it possible to raise your credit score? Because the FICO score is entirely based on a lifetime of credit history, it is hard to make a significant improvement in the number with quick fixes. (Of course you must have incorrect items removed from your credit report.)
Know your FICO score
To raise your score, you've got to have the credit reports that are used to build it, and of course, you need the score itself. Fair Isaac, the company that invented the original FICO score, sells FICO scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score as well as reports from all three agencies. 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 credit reporting 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.
Armed with this info, you'll be a more informed consumer and you'll be better positioned to get the most favorable mortgage.