How FICO Credit Scores Are Calculated

Because our world is so automated, it's probably not that surprising that your ability to repay virtually any loan boils down to a single number. Credit reporting agencies use your history of paying loans in order to build your FICO score.

The three reporting agencies use slightly different formulas to build a credit score. Fair Isaac and Cooriginally developed this score. . 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 these methods vary, each agency uses the following to determine your credit score:

  • Your Credit History - How long have you had credit?
  • Payment History - Do you pay your bills on time?
  • Credit Card Balances - How many accounts do you hold, and how much do you owe on them?
  • Credit Inquiries - How many times have you had your credit checked for a loan?

Each of these is assigned a value and a weight. Each formula produces a single number which varies slightly from one agency to another. Credit scores can be as low as 300 and as high as 800. Higher scores are better. Typical home buyers will likely find their FICO scores falling above 620.

Your FICO score affects your monthly payment

Did you know? 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

Unfortunately, there isn't a lot you can do to immediately improve your credit score. Because the FICO score is based on your lifelong credit history, it is difficult to change it quickly. (Of course you must appeal incorrect items on your credit report.)

How do I find out my credit score?

Before you can improve your score, you have to obtain your score and be sure that the credit reports from each 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 credit reports from all three agencies. Also available are information and online tools that help you analyze what actions might have the greatest impact on your FICO score.

You can get a free credit report once a year from the three major credit reporting agencies when you visit AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is quick and very inexpensive.

Now that you have all the facts, you will be a more informed consumer and you'll be better positioned to get the most favorable mortgage.

Curious about credit scores? Give us a call: (334) 285-8850.

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