How FICO Credit Scores Are Calculated

Because our world is so automated, it's probably not that surprising that your ability to repay your mortgage comes down to one number. All the years you've been paying your various bills: your mortgage, car payments, and credit card bills are analyzed, sliced, diced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

The three reporting 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, all of the agencies use the following to determine your score:

  • 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? How much do you owe on your accounts?
  • Inquiries on Your Credit - How many times have you had your credit checked for a loan?

These factors are assigned weights based on the formula being used. The result is a single number: your FICO score. Credit scores can be as low as 300 and as high as 800. Higher is always better. Typical home buyers probably find their scores between 620 and 800.

Your score affects your interest rate

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.

Can I raise my credit score?

Is there any way to raise your credit score? Since the score is based on a lifetime of credit history, it is hard to significantly improve the number with quick fixes. (Of course you can and should remove incorrect data on your credit report.)

Know your FICO score

Before you can improve your FICO score, you have to get your score and be sure that the credit reports from each credit 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 along with reports from all three agencies. They also provide information and online tools that can help you improve your FICO score.

You can get a federally-mandated free credit report once a year from the three major agencies by visiting AnnualCreditReport.com. These reports do not include a free credit 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 get the most favorable mortgage.

Want to know more about credit scores? Call us: 425-508-9988.

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