FICO Credit Scores: What Do They Mean?

Since we live in an computer-driven society, it's not surprising that your ability to repay your mortgage comes down to just one number. Credit reporting agencies use your history of paying loans in order to compile your FICO score.

All three major credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at 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 each of the models considers a range of data available in your credit report, the differences aren't huge; they all use the following factors in calculating a score:

  • Credit History - How many years have you had credit?
  • Late Payments - Do you have a history of late payments?
  • Balances on your Credit Cards - How many accounts do you hold? How much do you owe?
  • Inquiries on Your Credit - How many times have you had your credit checked for a loan?

These factors are assigned weights based on the formula being used. The result is a single number: your FICO score. Credit scores range from 300 to 800. Higher is always better. Most home buyers have a score 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.

Can I improve my FICO score?

What can you do to raise your FICO score? Very little in the short term. Since the FICO score is based on a lifetime of credit history, it is difficult to make a significant change in the number with quick fixes. (Of course you must appeal incorrect items on your credit report.)

How do I find out my credit score?

In order to improve your FICO score, you've got to have the reports that are used to build it. Of course, you need the score as well. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. For a reasonable fee, you can get your FICO score from all three reporting agencies, along with your credit report. They also provide information and online tools that can help you understand how to improve your credit score.

You can get a free credit report once a year from the three major credit reporting agencies when you visit 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 right mortgage for you.

Want to know more about credit scores? Call us at (334) 285-8850.

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