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 comes down to just 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.

The three credit reporting agencies use slightly different formulas to build 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 the formulas vary, the differences aren't huge; they all use the following to build a credit score:

  • Credit History - How many years have you had credit?
  • Late Payments - Have you paid more than 30 days late?
  • Credit Card Balances - How many credit card accounts do you have, and how much do you owe?
  • Inquiries on Your Credit - How many times have lenders pulled your credit for the purpose of giving you a loan?

These factors are weighted differently depending on which formula the agency uses. Each formula produces a single number which may vary a a little from one agency to another. Credit scores range from 300 to 800. Higher scores are better. Most people getting a mortgage score 620 or above.

Not just for qualifying

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

Unfortunately, there isn't a lot you can do to immediately improve your credit score. So called "credit repair" companies advertise quick fixes, but the FICO score is calculated from your lifetime credit history, so it's not possible to raise it significantly in the short term. (Of course you must remove incorrect data on your credit report.)

How do I find out my credit score?

Before you can improve your FICO score, you have to get your score and ensure that the reports from each agency are correct. Fair Isaac, the company that offered the original FICO credit score, offers scores on its website: myFICO.com. It's inexpensive to get your FICO from all three agencies, along with your credit report. Also available are information and tools that help you analyze what actions might have the greatest impact on your FICO score.

You can get a free credit report once per year from all three credit reporting agencies when you visit AnnualCreditReport.com. These reports do not include a free score, but it's very inexpensive to get one at the same time.

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? Call us: (972) 292-0448.

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