How FICO Credit Scores Are Calculated
Since our world is so automated, it should come as no surprise that your ability to repay virtually any loan boils down to a single number.
Credit reporting agencies use your payment history to compile this score.
Each of the three credit agencies has its own formula for building your credit score. The original FICO score 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 each of the models considers a range of data available in your credit report, all of the agencies use the following to build a credit score:
- Your Credit History - How many years have you had credit?
- Late Payments - Have you paid more than 30 days late, and how often?
- Credit Card Balances - How many accounts? How much do you owe?
- Credit Inquiries - How many times have lenders pulled your credit report for the purpose of lending you money?
Each of these factors is assigned a value and a weight. The results are added up and distilled into a single number. FICO scores can be as low as 300 and as high as 800. Higher scores are better. Most home buyers probably find their FICO scores between 620 and 800.
FICO makes a big difference in your interest rate
Did you know? 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.
Raising your FICO score
How can you raise 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. You should remove any incorrect data from your credit report, which is the only "quick fix" for credit troubles.
Getting your FICO score
Before you can improve your credit score, you have to know your score and make sure that the credit reports from each agency are correct. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. It's inexpensive, fast, and easy to get your credit score as well as reports from all three agencies. Also available are information and online tools that can help you improve your credit score.
You can get a federally-mandated free credit report every year from the three major agencies at AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is fast and very inexpensive.
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.
Curious about your FICO score? Call us: (718) 639-9500.