FICO Credit Scores: What Do They Mean?
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Since our society is so computer-driven, it's probably not that surprising that your ability to repay your mortgage boils down to one number.
The FICO score is compiled by credit agencies. They use the payment history from all of your loans: mortgages, car/motorcycle loans, credit cards, and others.
All three major credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a score. Fair Isaac and Cooriginally developed this score.
While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While these methods vary from one agency to another, all of the agencies use the following to calculate your credit score:
- Credit History - How many years have you had credit?
- Payment History - Do you have a history of late payments?
- Your Credit Card Balances - How many accounts do you have? How much do you owe on your accounts?
- 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. The results are added up and distilled into a single number. Credit scores can be as low as 300 and as high as 850. Higher is always better. Most people getting a mortgage these days have a score above 620.
Your credit score greatly affects your monthly payment
FICO scores affect more than your ability to get a loan. They also affect your interest rate. Lenders give lower interest rates to individuals with higher scores.
Can I raise my FICO 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 difficult to make a significant improvement in the score with quick fixes. (Of course you must remove incorrect data on your credit report.)
Know your FICO score
In order to improve your score, you've got to have the reports that the agencies use to build it, and of course, you need the score itself. Fair Isaac, the corporation that invented the first FICO credit score, sells scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score along with credit reports from all three agencies. Also available are information and online tools that help you improve your FICO score.
You can get a free credit report once per year from the three major credit reporting 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 information, 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 credit scores? Call us: 866-300-1550.