You Credit Score: How's Your FICO?
Since we live in an computer-driven society, it should come as no surprise that your ability to repay your mortgage comes down to just one number.
This score is built by credit reporting agencies. These agencies use the payment history from all of your loans: mortgages, car/motorcycle loans, credit cards, etcetera.
The three agencies use slightly different formulas to build a credit score. The original FICO model 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, all of the agencies use the following to calculate your score:
- Your Credit History - How long have you had credit?
- Payment History - Do you have a history of late payments?
- Your Credit Card Balances - How many credit card accounts do you hold, and how much do you owe on them?
- Inquiries on Your Credit - How many times have you had your credit checked for a loan?
Each of these factors is assigned a value and a weight. The results are added up and distilled into a single number. Credit scores can be as low as 300 and as high as 800. Higher is better. Most home buyers these days have a score above 620.
Your credit score affects your interest rate
Credit 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.
Can I raise my FICO score?
What can you do to improve your FICO score? Unfortunately, not much. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. You must appeal for the credit agency to remove any incorrect data from your credit report; this is the only "quick fix" for credit problems.
Know your FICO
To raise your FICO score, you've got to 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 credit reports from all three agencies. They also provide 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 every year from the three major credit reporting agencies by visiting AnnualCreditReport.com. These reports do not include a free credit score, but it's very inexpensive to get one at the same time.
Now that you have all the facts, you will be a more informed consumer and you'll be better positioned to get the right mortgage for you.
Curious about credit scores? Call us: (513) 713-1515.