How FICO Credit Scores Are Calculated
Since our world is so computer-driven, it's probably not that surprising that your creditworthiness boils down to one number.
The years of paying your various bills: your mortgage, car payments, and credit card bills are analyzed, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.
Each of the three credit agencies has its own formula for building your 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, all of the agencies use the following to build your credit score:
- Credit History - How many years have you had credit?
- Late Payments - Have you paid more than 30 days late?
- Your Credit Card Balances - How many accounts? How much do you owe?
- Credit Inquiries - How many times have you had your credit checked for a loan?
These factors are weighted slightly differently depending on which formula the agency uses. The results are added up and distilled into a single number. FICO scores range from 300 to 800. Higher is always better. Most home buyers these days have a score above 620.
FICO makes a big difference in your interest rate
Did you know? FICO 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.
Raising your FICO score
Is there any way to improve your credit score? Since the FICO score is based on your lifelong credit history, it is difficult to change it quickly. (Of course you can and should appeal incorrect items on your credit report.)
How do I find out my FICO score?
In order to improve your credit score, you must obtain 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. For a reasonable fee, you can get your FICO from all three agencies, along with your credit report. Also available are helpful information and online tools that help you improve your credit score.
You can get a free credit report once a year from the three major agencies at 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 your FICO score? Give us a call at (720) 550-4235.