How FICO Credit Scores Are Calculated

Because we live in an automated, you're probably not surprised to hear that your ability to repay virtually any loan comes down to a single number. This score is compiled by credit reporting agencies. These agencies use the payment history from your various loans: credit cards, mortgages, car loans etcetera.

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. While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "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 building a credit score:

  • Credit History - Have you had credit for many years, or for a short time?
  • Payment History - Do you pay your bills on time?
  • Balances on your Credit Cards - How many accounts do you have? How much do you owe on your accounts?
  • Requests for Credit - How many times have you had your credit checked for a loan?

Each of these factors is assigned a value and a weight. The result is a single number: your FICO score. Credit scores can be as low as 300 and as high as 800. Higher is better. Typical home buyers likely find their credit scores falling above 620.

FICO makes a huge difference in interest rates

FICO 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.

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. You should, of course, appeal for the credit agency to remove any incorrect reporting on your credit report, which is the only "quick fix" for credit troubles.

How do I find out my credit score?

In order to improve your FICO score, you must have 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 quickly 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 federally-mandated free credit report every year from the three major agencies by visiting 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 info, you will be a more informed consumer and you'll be better positioned to get the right mortgage for you.

Want to know more about your credit score? Give us a call: 2147187183.