How's your FICO Score?
Since we live in an computer-driven world, it's not surprising that your ability to repay your mortgage loan comes down to just one number. Credit reporting agencies use your history of paying all types of loans in order to create your FICO score.
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. 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; all of the agencies use the following factors in building your score:
- Your Credit History - Have you had credit for many years, or for just a short time?
- History of Payments - Do you pay your bills on time?
- Credit Card Balances - How many accounts? How much do you owe on your accounts?
- Credit Inquiries - 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. The result is one number. Credit scores range from 300 to 800. Higher is better. Most home buyers in the current environment have a score above 620.
Credit scores make a huge difference in interest rates
Did you know? 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 improve my credit 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. You should appeal for the credit agency to remove any incorrect data on your credit report; this is the only "quick fix" for credit problems.
How do I find out my credit score?
To raise your FICO score, you must obtain the reports that are used to build it, and of course, you need the score itself. Fair Isaac, the company that invented the original FICO credit score, offers scores on myFICO.com. It's inexpensive to get your FICO score from all three agencies, along with your credit report. They also provide helpful information and tools that help you understand how to improve your FICO score.
You can get a federally-mandated free credit report once a 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.
Now that you have all the facts, you'll be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.