How FICO Credit Scores Are Calculated
Because our world is so automated, it's probably not that surprising that your creditworthiness comes down to a single number.
Credit reporting agencies use your history of paying all types of loans to build your FICO score.
Each of the three credit reporting agencies has its own formula for building your credit score. The original FICO model was developed by Fair Isaac and Company.
While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While the formulas vary from one agency to another, the differences aren't huge; they all use the following to calculate your score:
- Credit History - Have you had credit for many years, or for a short time?
- Payment History - Have you paid more than 30 days late, and how often?
- Balances on your Credit Cards - How many accounts do you carry? How much do you owe on your accounts?
- Requests for Credit - 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. Each formula produces a single number which varies slightly by agency. FICO scores range from 300 to 800. Higher is better. Most home buyers have a score above 620.
Your score greatly affects your interest rate
Did you know? 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.
Improving your score
Is it possible to raise your credit score? Because the FICO score is based on a lifetime of credit history, it's very difficult to change it quickly. You should, of course, remove any incorrect data from your credit report, which is the only "quick fix" for credit troubles.
How do I find out my FICO score?
To improve your FICO score, you've got to obtain the credit reports that the agencies use to build it, and of course, you need the score itself. 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 score from all three reporting agencies, along with your credit report. They also provide information and tools that can help you understand how to improve your credit score.
You can get a free credit report once per year from all three agencies at AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it is quick and inexpensive.
Armed with this info, you'll be a more informed consumer and you'll be better positioned to get the right mortgage for you.
Curious about your FICO score? Call us: (512) 335-7800.