How FICO Credit Scores Are Calculated

Because we live in an automated, it's probably not that surprising that your ability to repay your mortgage comes down to one number. This score is built by credit agencies. These agencies use the payment history of all of your loans: credit cards, mortgages, car loans and others.

All three credit agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a 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, each agency uses the following to calculate a credit score:

• Your Credit History - Have you had credit for many years, or for just a short time?
• History of Payments - Do you pay your bills on time?
• Your Credit Card Balances - How many credit card accounts do you hold, and how much do you owe on them?
• Requests for Credit - How many times have you had your credit checked for 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 is better. Most borrowers getting a mortgage in the current environment have a score above 620.

Credit scores make a difference in your interest rate

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.

Raising your FICO score

Is it possible to improve your FICO score? Despite what you hear from "credit repair" companies, the FICO score is based on your lifelong credit history, so you can't turn it around right away. (Of course you can and should appeal incorrect items on your credit report.)

Getting your FICO score

Before you can improve your FICO score, you have to obtain your score and make sure that the credit reports from each reporting agency are correct. 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 credit reports from all three credit reporting agencies. Also available are helpful information and tools that can help you improve your credit score.

You can get a free credit report every year from the three major agencies at 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 obtain the most favorable mortgage.

Want to know more about your FICO score? Call us at 425-508-9988.