FICO Credit Scores: What Do They Mean?

Since we live in an automated, it's probably not that surprising that your ability to repay virtually any loan boils down to one number. The FICO score is compiled by credit reporting agencies. They use the payment history of all of your loans: credit cards, mortgages, car loans and others.

TransUnion, Equifax, and Experian, the three major credit agencies, each have a proprietary formula for building your 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 the formulas vary, the differences aren't huge; each agency uses the following factors in building a credit score:

  • Your Credit History - How many years have you had credit?
  • Payment History - Do you have a history of late payments?
  • Balances on your Credit Cards - How many accounts? How much do you owe on your accounts?
  • Inquiries on Your Credit - How many times have lenders pulled your credit for the purpose of giving you a loan?

These factors are assigned weights based on the formula being used. Each formula produces a single number which varies slightly by agency. FICO scores can be as low as 300 and as high as 800. Higher is better. Most folks getting a mortgage loan these days have a score above 620.

Your FICO score greatly affects your interest rate

Credit scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are a better credit risk, and thus may qualify for a better mortgage rate.

Improving your score

Is there any way to improve your credit score? Some companies promise quick fixes, but they can't do anything different than what you can do — for free. You should, of course, remove any incorrect reporting on your credit report, which is the only way to quickly improve your credit score.

Know your FICO

Before you can improve your FICO score, you must get your score and be 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 to quickly get your FICO score from all three agencies, along with your credit report. They also provide information and online tools that can help you analyze what actions might have the greatest impact on your FICO score.

You can get a federally-mandated free credit report every year from the three major agencies when you visit AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it is quick and very inexpensive.

Now that you have all the facts, you will be a more informed consumer and you'll be better positioned to get the most favorable mortgage.

Curious about your credit score? Give us a call: 978-422-2311.

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