About the FICO Credit Score
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Since we live in an computer-driven world, it should come as no surprise that your ability to repay your mortgage loan boils down to just one number.
All the years you've been 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.
Each of the three credit reporting agencies has its own formula for building your credit score. The original FICO score was developed by Fair Isaac and Company.
Experian uses this model and calls its score FICO. Equifax's model, based on FICO, is called BEACON, while TransUnion, which also uses a slightly modified FICO, calls its score EMPIRICA. While each of the models considers a range of data available in your credit report, each agency uses the following to build your score:
- Credit History - How long have you had credit?
- History of Payments - Do you have any payments later than 30 days?
- Balances on your Credit Cards - How many accounts do you hold, and how much do you owe?
- Credit Inquiries - How many times have lenders pulled your credit for the purpose of lending you money?
These factors are weighted a little bit differently depending on the formula being used. The result is a single number: your credit score. Credit scores can be as low as 300 and as high as 850. Higher is always better. Most home buyers in the current environment have a score 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. Lenders give lower interest rates to individuals with higher scores.
Improving your score
Unfortunately, there isn't a lot you can do to immediately improve your credit score. Because the score is based on a lifetime of credit history, it's very difficult to change it quickly. (Of course you must remove incorrect data on your credit report.)
Know your FICO score
Before you can improve your credit score, you have to know your score and make sure that the credit reports from each credit reporting agency are correct. Fair Isaac, the corporation that offered the original FICO score, sells scores on its website: myFICO.com. For a reasonable fee, you can quickly get your FICO from all three agencies, along with your credit report. They also provide helpful information and online tools that help you improve your FICO score.
You can get a federally-mandated free credit report once a year from all three credit reporting agencies by visiting AnnualCreditReport.com. While this report does not include a free credit score, the cost to "upgrade" your report to include a credit score is very reasonable.
Now that you have all the facts, you'll be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.
Curious about credit scores? Give us a call at 952-405-2090.