FICO Credit Scores: What Do They Mean?
Because we live in an automated, it should come as no surprise that your ability to repay virtually any loan comes down to one number.
All the years you've been paying your various bills: your mortgage, vehicle payments, and credit card bills are analyzed, sliced, 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 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 the formulas vary, all of the agencies use the following to calculate your score:
- Your 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?
- Requests for Credit - How many times have lenders pulled your credit for the purpose of lending you money?
These factors are assigned weights based on the formula being used. The result is a single number: your credit score. FICO scores range from 300 to 800. Higher is always better. Most home buyers will likely find their FICO scores between 620 and 800.
Your credit score affects your interest rate
Did you know? 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 FICO score
What can you do about your FICO score? Very little in the short term. Since the score is based on a lifetime of credit history, it is hard to change it quickly. (Of course you can and should have incorrect items removed from your credit report.)
How do I find out my credit score?
Before you can improve your credit score, you have to obtain your score and make sure that the credit reports from each reporting agency are correct. Fair Isaac, the corporation that invented the first FICO credit score, offers scores on myFICO.com. It's inexpensive to quickly get your FICO score from all three reporting agencies, along with your credit report. Also available are helpful information and online 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 per year from all three agencies when you visit AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it is quick and inexpensive.
Armed with this information, you'll be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.
Want to know more about your credit score? Call us at 561-395-4264.