How FICO Credit Scores Are Calculated

Since we live in an automated, it's probably not that surprising that your creditworthiness boils down to a single number. The FICO score is built by credit reporting agencies. These agencies use the payment history from all of your loans: credit cards, mortgages, car/boat loans and others.

All three major credit reporting 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 the formulas vary, the differences aren't huge; each agency uses the following to calculate a score:

  • Credit History - How long have you had credit?
  • Payment History - Do you have any payments later than 30 days?
  • Credit Card Balances - How many accounts do you hold? How much do you owe on your accounts?
  • Credit Inquiries - How many times have lenders pulled your credit report for the purpose of giving you a loan?

Each of these is assigned a value and a weight. The results are added up and distilled into a single number. FICO scores range from 300 to 800. Higher scores are better. Typical home buyers will likely find their FICO scores above 620.

Credit scores make a difference in interest rates

FICO 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

Unfortunately, there isn't a lot you can do to immediately improve your credit score. Because the score is entirely based on a lifetime of credit history, it is hard to significantly improve the number with quick fixes. (Of course you can and should appeal incorrect items on your credit report.)

Know your FICO score

Before you can improve your credit score, you must get your score and make certain that the credit reports from each 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 credit reports from all three credit reporting agencies. They also provide information and 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 once per year from all three agencies when you visit 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 your FICO score? Call us: 978-422-2311.

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