How FICO Credit Scores Are Calculated

Since we live in an automated, it should come as no surprise that your ability to repay your mortgage loan comes down to one number. This score is created by credit reporting agencies. These agencies use the payment history from all of your loans: mortgages, car/motorcycle loans, credit cards, and the like.

Each of the three credit agencies has its own formula for building your credit score. The original FICO score 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, the differences aren't huge; each agency uses the following in calculating 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?
• Balances on your Credit Cards - How many credit card accounts do you hold, and how much do you owe on them?
• Requests for Credit - How many times have you had your credit checked for a loan?

Each of these factors is assigned a value and a weight. Each formula produces a single number which varies slightly by agency. Credit scores can be as low as 300 and as high as 800. Higher is always better. Most folks who want to get a mortgage in the current environment have a score above 620.

Credit scores make a difference in interest rates

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.

Improving your score

What can you do about your FICO score? Very little in the short term. Because the FICO score is entirely based on your lifelong credit history, it's very difficult to significantly improve the number with quick fixes. You should, of course, appeal for the credit agency to remove any incorrect reporting on your credit report; this is the only way to quickly improve your credit score.

How do I find out my credit score?

Before you can improve your score, you must obtain your score and make sure that the reports from each reporting 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 reports from all three credit reporting agencies. Also available are information and online tools that help you understand how to improve your FICO score.

You can get a federally-mandated free credit report once per year from the three major agencies at 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.

Armed with this information, you'll be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.

Want to know more about your credit score? Give us a call at (207) 571-8034.