How FICO Credit Scores Are Calculated

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Since we live in an automated world, you're probably not surprised to hear that your ability to repay your mortgage loan comes down to a single number. Your fico score, a number compiled by credit reporting agencies. 

All three credit agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at 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, all of the agencies use the following to determine your credit score:

  • Credit History - How many years have you had credit?
  • Payment History - Do you have a history of late payments?
  • Your Credit Card Balances - How many accounts do you have? How much do you owe on your accounts?
  • 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. Each formula produces a single number which may vary a a little from one agency to another. Credit scores can be as low as 300 and as high as 800. Higher is always better. Most home buyers these days have a score above 620.

Your score affects your monthly payment

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 improve my FICO score?

What can you do about your FICO score in the short term? Unfortunately, not much. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. (Of course you must remove incorrect data on your credit report.)

Getting your credit score

Before you can improve your score, you must know your score and be sure that the reports from each agency are correct. Fair Isaac, the company that offered the original FICO credit score, sells FICO scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score as well as credit reports from all three agencies. They also provide helpful information and tools that help you understand how to improve your FICO score.

A quick and inexpensive way to get a free credit report once a year from all three agencies is to visit AnnualCreditReport.com. To find out your actual credit score from AnnualCreditReport.com is not free.

Armed with this info, you will be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.

 

Curious about your credit score? Give Joe Wagner a call: 612-327-4544.

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