How FICO Credit Scores Are Calculated

Since we live in an automated society, it should come as no surprise that your ability to repay your mortgage loan boils down to a single number. The years of paying your various bills: your mortgage, vehicle payments, and credit card bills can be analyzed, sliced, diced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

The three agencies use slightly different formulas to build 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 the formulas vary, each agency uses the following to determine your credit score:

  • Credit History - How many years have you had credit?
  • Payment History - Have you paid more than 30 days late, and how often?
  • Balances on your Credit Cards - How many accounts do you have, and how much do you owe on them?
  • Requests for Credit - How many times have you had your credit checked for a loan?

These factors are assigned weights based on the formula being used. The results are added up and distilled into a single number. Credit scores can be as low as 300 and as high as 800. Higher scores are better. Most home buyers these days have a score above 620.

Not just for qualifying

FICO scores affect more than your ability to get a loan. They also affect your interest rate. Higher scores indicate you are a better credit risk, and thus may qualify for a better mortgage rate.

Raising your FICO 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. You must, of course, appeal for the credit agency to remove any incorrect reporting on your credit report; this is the only way to quickly improve your credit score.

How do I find out my FICO score?

Before you can improve your FICO score, you have to obtain your score and make certain that the reports from each credit reporting agency are correct. Fair Isaac, the corporation that invented the original FICO credit score, sells credit scores on its website: myFICO.com. It's inexpensive, fast, and easy to get your credit score along with reports from all three reporting agencies. They also provide information and tools that can help you improve your credit score.

You can get a federally-mandated free credit report once per year from the three major agencies by visiting AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it is quick and inexpensive.

Now that you have all the facts, you will be a more informed consumer and you'll be better positioned to obtain the right mortgage for you.

Curious about credit scores? Call us at 218-237-5128.

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