How FICO Credit Scores Are Calculated

Since we live in an computer-driven world, it's not surprising that your ability to repay your mortgage loan boils down to just one number. The years of paying your various bills: your mortgage, car payments, and credit card bills can be analyzed, sliced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

TransUnion, Equifax, and Experian, the three major credit reporting agencies, each have a proprietary formula for building your 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 each of the models considers a range of data available in your credit report, all of the agencies use the following to build a credit score:

  • Credit History - Have you had credit for years, or for a short time?
  • Payment History - Do you have a history of late payments?
  • Credit Card Balances - How many accounts do you have? How much do you owe?
  • Credit Inquiries - How many times have lenders pulled your credit for the purpose of giving you a loan?

These factors are weighted a little bit differently depending on the formula being used. The result is a single number: your FICO score. FICO scores range from 300 to 800. Higher scores are better. Most borrowers getting a mortgage these days score 620 or above.

Your FICO score greatly affects how much you pay in interest every month

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.

Can I raise my FICO score?

Unfortunately, there isn't a lot you can do to immediately improve your credit score. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. (Of course you must appeal incorrect items on your credit report.)

Know your FICO score

In order to raise your score, you must get the reports that the agencies use to build it, and of course, you need the score itself. 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 reports from all three reporting agencies. Also available are helpful information and online tools that help you understand how to improve your FICO score.

You can get a free credit report every year from all three credit reporting agencies when you visit AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is fast and inexpensive.

Armed with this information, you'll be a more informed consumer and you'll be better positioned to get the right mortgage for you.

Want to know more about credit scores? Call us: (832) 730-2000.

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