How FICO Credit Scores Are Calculated
Because our world is so computer-driven, it's probably not that surprising that your creditworthiness comes down to a single number.
The FICO score is created by credit reporting agencies. These agencies use the payment history from all of your loans: mortgages, car/motorcycle/boat loans, credit cards, and others.
TransUnion, Equifax, and Experian, the three major credit agencies, each have their own proprietary formula for building your 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, the differences aren't huge; they all use the following factors to build your credit score:
- Your Credit History - How long have you had credit?
- Late Payments - Have you paid more than 30 days late, and how often?
- Credit Card Balances - How many accounts do you hold, and how much do you owe?
- Requests for Credit - How many times have lenders pulled your credit report for the purpose of giving you a loan?
Each of these factors is assigned a value and a weight. Each formula produces a single number which may vary a a little by agency. Credit scores range from 300 to 800. Higher scores are better. Most borrowers getting a mortgage loan these days have a score above 620.
Not just for qualifying
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.
Raising your credit score
How can you improve your FICO score? Since the credit score is entirely based on your lifelong credit history, it's very difficult to significantly improve the score with quick fixes. (Of course you can and should remove incorrect data on your credit report.)
Getting your FICO score
In order to improve your FICO score, you've got to have the reports that the agencies use 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. It's inexpensive, fast, and easy to get your credit score as well as reports from all three reporting agencies. Also available are helpful information and 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 once a year from all three credit reporting agencies when you visit AnnualCreditReport.com. These reports do not include a free score, but it's very inexpensive to get one at the same time.
Now that you have all the facts, you'll be a more informed consumer and you'll be better positioned to get the most favorable mortgage.
Curious about your FICO score? Call us: (334) 285-8850.