FICO Credit Scores: What Do They Mean?

Since we live in an automated world, it should come as no surprise that your ability to repay your mortgage loan comes down to a single number. Credit reporting agencies use your history of paying loans to compile this score.

The three credit reporting agencies use slightly different formulas to build a credit score. The original FICO 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; all of the agencies use the following to build a score:

  • Your 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. Each formula produces a single number which may vary a a little from one agency to another. FICO scores can be as low as 300 and as high as 800. Higher is better. Most borrowers who want to get a mortgage loan these days have a score above 620.

FICO makes a big difference in interest rates

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

What can you do to raise your FICO score? Unfortunately, not much. Because the credit score is entirely based on a lifetime of credit history, it's very difficult to change it quickly. (Of course you can and should appeal incorrect items on your credit report.)

Getting your credit score

To improve your score, you've got to have the reports that are used 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. For a reasonable fee, you can quickly get your FICO score from all three agencies, along with your credit report. They also provide helpful information and online tools that can help you improve your FICO score.

You can get a federally-mandated free credit report every year from the three major credit reporting agencies at AnnualCreditReport.com. These reports do not include a free credit score, but it's very inexpensive to get one at the same time.

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 credit scores? Call us: 978-422-2311.

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