How FICO Credit Scores Are Calculated
Because we live in an automated, it should come as no surprise that your creditworthiness boils down to a single number.
The years of paying your various bills: your mortgage, vehicle payments, and credit card bills are analyzed, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.
Each of the three credit reporting agencies has its own 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 these methods vary, all of the agencies use the following to determine your credit score:
- Your Credit History - How long have you had credit?
- Late Payments - Do you have a history of late payments?
- Balances on your Credit Cards - How many accounts do you carry? How much do you owe on your accounts?
- Requests for Credit - How many times have lenders pulled your credit for the purpose of lending you money?
Each of these factors 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 is better. Most home buyers these days have a score above 620.
Your score affects your interest rate
Did you know? 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.
Can I raise my FICO score?
Is it possible to raise your credit score? Some companies promise quick fixes, but they can't do anything different than what you can do — for free. You must, of course, appeal for the credit agency to remove any incorrect data from your credit report, which is the only way to quickly improve your credit score.
How do I find out my FICO score?
Before you can improve your score, you must get your score and be sure that the credit reports from each agency are correct. Fair Isaac, the corporation that invented the original FICO score, offers scores on its website: myFICO.com. It's inexpensive to get your FICO score from all three agencies, along with your credit report. Also available are helpful 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 once a year from all three 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.
Armed with this info, you'll be a more informed consumer and you'll be better positioned to get the most favorable mortgage.
Curious about credit scores? Call us at 978-422-2311.