How's your FICO Score?

Since our world is so computer-driven, you're probably not surprised to hear that your ability to repay virtually any loan comes down to one number. This score is compiled by credit agencies. These agencies use the payment history of all of your loans: credit cards, mortgages, car loans and others.

The three credit reporting agencies use slightly different formulas to build a credit score. The original FICO score 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 the formulas vary, the differences aren't huge; each agency uses the following factors to build your score:

  • Your Credit History - How long have you had credit?
  • Payment History - Do you have a history of late payments?
  • Balances on your Credit Cards - How many accounts do you have, and how much do you owe on them?
  • Inquiries on Your Credit - How many times have lenders pulled your credit report for the purpose of giving you a loan?

These factors are weighted differently depending on the formula being used. The result is a single number: your credit score. Credit scores range from 300 to 800. Higher is better. Most people getting a mortgage loan in the current environment have a score above 620.

Your credit score affects how much you pay in interest every month

Did you know? FICO scores affect more than your ability to get a loan. They also affect your interest rate. Higher scores indicate you are probably a better credit risk, and thus may qualify for a better mortgage rate.

Improving your score

What can you do to raise your FICO score? Unfortunately, not much. Despite what you hear from "credit repair" companies, the score is calculated from your lifelong credit history, so it's not possible to raise it significantly in the short term. You must appeal for the credit agency to remove any incorrect reporting from your credit report, which is the only way to quickly improve your credit score.

Know your FICO score

Before you can improve your credit score, you must get your score and be 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 agencies. They also provide helpful information and tools that help you analyze what actions might have the greatest impact on your FICO score.

You can get a federally-mandated free credit report once per 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 it is fast and very inexpensive.

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

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

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