FICO Credit Scores: What Do They Mean?

Since we live in an automated world, it's not surprising that your ability to repay your mortgage boils down to just one number. All the years you've been paying your various bills: your mortgage, car payments, and credit card bills can be analyzed, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

All three credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a 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, the differences aren't huge; they all use the following in calculating your score:

• Your Credit History - Have you had credit for years, or for a short time?
• History of Payments - Do you have any payments later than 30 days?
• Your Credit Card Balances - How many accounts do you hold, and how much do you owe?
• Credit Inquiries - How many times have you had your credit checked for a loan?

Each of these is assigned a value and a weight. The result is a single number: your FICO score. FICO scores range from 300 to 800. Higher is always better. Most home buyers these days have a score above 620.

Your score affects your interest rate

FICO scores affect more than your ability to get a loan. They also affect your interest rate. 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. Since the score is based on a lifetime of credit history, it's very hard to make a significant improvement in the number with quick fixes. (Of course you must have incorrect items removed from your credit report.)

Know your FICO score

Before you can improve your FICO score, you have to know your score and make sure that the reports from each agency are correct. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. It's inexpensive to get your FICO score from all three agencies, along with your credit report. Also available are helpful information and tools that help you understand how to improve your FICO score.

You can get a federally-mandated free credit report every year from all three credit reporting agencies when you visit AnnualCreditReport.com. While this report does not include a free credit score, the cost to "upgrade" your report to include a credit score is very reasonable.

Armed with this information, you'll be a more informed consumer and you'll be better positioned to obtain the right mortgage for you.

Want to know more about credit scores? Give us a call at 9254610500.