FICO Credit Scores: What Do They Mean?

Since our society is so automated, it's probably not that surprising that your ability to repay virtually any loan boils down to one number. Credit reporting agencies use your history of paying all types of loans to create a 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. 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 from one agency to another, each agency uses the following to determine your credit score:

• Credit History - How long have you had credit?
• Late Payments - Do you pay your bills on time?
• Balances on your Credit Cards - How many accounts? How much do you owe?
• Inquiries on Your Credit - How many times have you had your credit checked for a loan?

Each of these is assigned a value and a weight. Each formula produces a single number which varies slightly from one agency to another. Credit scores can be as low as 300 and as high as 800. Higher scores are better. Most home buyers these days have a score above 620.

Your FICO score affects how much you pay in interest every month

Credit scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are probably a better credit risk, and thus may qualify for a better mortgage rate.

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 based on your lifetime credit history, so it's not possible to raise it significantly in the short term. (Of course you must appeal incorrect items on your credit report.)

Know your FICO

Before you can improve your FICO score, you must obtain your score and make sure that the credit reports from each credit reporting agency are correct. Fair Isaac, the company that invented the original FICO credit score, sells credit scores on its website: myFICO.com. It's inexpensive, fast, and easy to get your credit score along with reports from all three agencies. Also available are helpful information and tools that can help you understand how to improve your credit score.

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

Now that you have all the facts, you'll be a more informed consumer and you'll be better positioned to get the most favorable mortgage.

Want to know more about your credit score? Call us: 5613734149.