How FICO Credit Scores Are Calculated
Because we live in a computer-driven world, it should come as no surprise that your ability to repay virtually any loan comes down to a single number.
The FICO score is built by credit agencies. These agencies use the payment history of your various loans: mortgages, car/motorcycle loans, credit cards, etcetera.
Experian, TransUnion, and Equifax, the three major credit agencies, each have a 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 these methods vary, all of the agencies use the following to calculate your score:
- Your Credit History - How long have you had credit?
- Late Payments - Do you pay your bills on time?
- Balances on your Credit Cards - How many accounts? How much do you owe?
- Requests for Credit - How many times have you had your credit checked for a loan?
These factors are weighted slightly differently depending on the formula being used. The results are added up and distilled into a single number. FICO scores can be as low as 300 and as high as 800. Higher is better. Most home buyers will probably find their credit scores falling between 620 and 800.
Your score greatly affects your monthly payment
Did you know? FICO 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
Is it possible to improve your FICO score? Since the FICO score is based on a lifetime of credit history, it is hard to make a significant improvement in the number with quick fixes. You must, of course, remove any incorrect data from your credit report; this is really the only way to quickly improve your credit score.
How do I find out my FICO score?
In order to improve your score, you must have 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 as well as reports from all three credit reporting agencies. Also available are helpful 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 a 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 will be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.
Want to know more about your FICO score? Give us a call: (808) 935-0678.