How FICO Credit Scores Are Calculated

Because we live in a computer-driven world, it's probably not that surprising that your creditworthiness boils down to one number. All the years you've been paying your various bills: your mortgage, vehicle payments, and credit card bills can be analyzed, sliced, diced, 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. 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, all of the agencies use the following to calculate your score:

  • Your Credit History - Have you had credit for years, or for just a short time?
  • History of Payments - Do you pay your bills on time?
  • Credit Card Balances - How many accounts do you have? How much do you owe on your accounts?
  • Credit Inquiries - How many times have lenders pulled your credit for the purpose of lending you money?

These factors are assigned weights based on the formula being used. Each formula produces a single number which varies slightly from one agency to another. Credit scores range from 300 to 800. Higher is better. Most home buyers have a score above 620.

Not just for qualifying

FICO scores affect more than your ability to get a loan. They also affect your interest rate. Lenders give lower interest rates to individuals with higher scores.

Raising your credit score

Unfortunately, there isn't a lot you can do to immediately improve your credit score. Since the FICO score is based on a lifetime of credit history, it's difficult to change it quickly. You should, of course, appeal for the credit agency to remove any incorrect data from your credit report; this is the only way to quickly improve your credit score.

How do I find out my FICO score?

Before you can improve your FICO score, you have to get your score and make sure that the credit reports from each agency are correct. Fair Isaac, the company that invented the first FICO credit score, sells credit scores on its website: myFICO.com. It's inexpensive to quickly get your FICO score from all three reporting agencies, along with your credit report. They also provide information and tools that can help you improve your FICO score.

You can get a free credit report every year from all three agencies by visiting 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'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: 8327302000.

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