How FICO Credit Scores Are Calculated
Because we live in an automated, you're probably not surprised to hear that your creditworthiness boils down to a single number.
Credit reporting agencies use your loan payment history in order to create a FICO score.
Experian, TransUnion, and Equifax, the three major credit agencies, each have a proprietary formula for building a credit 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 each of the models considers a range of data available in your credit report, the differences aren't huge; all of the agencies use the following factors in calculating your score:
- Your Credit History - How many years have you had credit?
- Late Payments - Have you paid more than 30 days late?
- Your Credit Card Balances - How many accounts do you carry? How much do you owe?
- Requests for Credit - How many times have lenders pulled your credit for the purpose of lending you money?
These factors are weighted differently depending on which formula the agency uses. The results are added up and distilled into a single number. Credit scores range from 300 to 800. Higher is always better. Most home buyers have a score above 620.
Credit scores make a big difference in interest rates
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.
Improving your score
Is it possible to improve your FICO score? So called "credit repair" companies advertise quick fixes, but the score is based on your lifelong 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 from your credit report, which is the only "quick fix" for credit problems.
Know your FICO
To improve your FICO score, you've got to obtain the reports that the agencies use to build it, and of course, you need the score itself. Fair Isaac, the corporation that invented the original FICO score, offers FICO scores on myFICO.com. It's inexpensive to quickly get your FICO from all three agencies, along with your credit report. They also provide information and online tools that can help you understand how to improve your credit score.
You can get a free credit report every year from the three major credit reporting 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.
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 your FICO score? Give us a call: 708.966.9005.