FICO Credit Scores: What Do They Mean?
Since our world is so automated, it should come as no surprise that your ability to repay your mortgage loan comes down to one number.
All the years you've been paying your various bills: your mortgage, car payments, and credit card bills can be analyzed, diced, 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. 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 these methods vary, the differences aren't huge; all of the agencies use the following to build a score:
- Credit History - How long have you had credit?
- Payment History - Do you have a history of late payments?
- Your Credit Card Balances - How many credit card accounts do you hold, and how much do you owe?
- Requests for Credit - How many times have you had your credit checked for a loan?
Each of these is assigned a value and a weight. Each formula produces a single number which may vary a a little by agency. FICO scores range from 300 to 800. Higher is better. Typical home buyers probably find their scores between 620 and 800.
Your FICO score greatly affects how much you pay in interest every month
Did you know? Credit scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are probably a better credit risk, and thus may qualify for a better mortgage rate.
Can I raise my credit score?
Unfortunately, there isn't a lot you can do to immediately improve your credit score. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. (Of course you can and should have incorrect items removed from your credit report.)
Know your FICO score
Before you can improve your score, you have to get your score and be sure that the credit reports from each reporting agency are correct. Fair Isaac, the corporation that offered the original FICO score, offers scores on its website: myFICO.com. It's inexpensive, fast, and easy to get your credit score along with reports from all three reporting agencies. They also provide helpful information and tools that can help you understand how to improve your credit score.
You can get a free credit report once a year from all three credit reporting agencies by visiting AnnualCreditReport.com. These reports do not include a free credit score, but it's very inexpensive to get one at the same time.
Armed with this information, you will be a more informed consumer and you'll be better positioned to get the right mortgage for you.
Curious about credit scores? Call us: 561-395-4264.