How FICO Credit Scores Are Calculated

Because our world is so computer-driven, you're probably not surprised to hear that your creditworthiness comes down to a single number. Credit reporting agencies use your history of paying all types of loans in order to create this score.

The three credit reporting agencies use slightly different formulas to build a 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 the formulas vary from one agency to another, all of the agencies use the following to build your credit score:

  • Your Credit History - How many years have you had credit?
  • History of Payments - Do you have a history of late payments?
  • Balances on your Credit Cards - How many accounts do you hold, and how much do you owe?
  • Credit Inquiries - How many times have lenders pulled your credit report for the purpose of giving you a loan?

These factors are weighted a little bit differently depending on the formula being used. The result is a single number: your FICO score. Credit scores range from 300 to 800. Higher is better. Most people getting a mortgage in the current environment score 620 or above.

FICO makes a difference in interest rates

Did you know? 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

Unfortunately, there isn't a lot you can do to immediately improve your credit score. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. (Of course you must remove incorrect data on your credit report.)

Know your FICO score

Before you can improve your credit score, you have to get your score and ensure that the reports from each agency are correct. Fair Isaac, the company that offered the first FICO credit score, sells credit scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score along with reports from all three credit reporting agencies. They also provide helpful information and online tools that help you improve your FICO score.

You can get a free credit report once per year from all three agencies at 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 get the most favorable mortgage.

Want to know more about credit scores? Give us a call: 7186399500.

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