How FICO Credit Scores Are Calculated

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Because our society is so computer-driven, you're probably not surprised to hear that your creditworthiness boils down to a single number. Credit reporting agencies use your history of paying loans in order to create 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. While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While the formulas vary, the differences aren't huge; each agency uses the following to build a credit score:

  • Your Credit History - Have you had credit for many years, or for just a short time?
  • Payment History - Do you pay your bills on time?
  • Your Credit Card Balances - How many accounts do you have? How much do you owe on your accounts?
  • Credit Inquiries - How many times have you had your credit checked for 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 can be as low as 300 and as high as 800. Higher is always better. Most folks who want to get a mortgage loan these days have a score above 620.

Your FICO score affects your interest rate

Did you know? 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. Because the FICO score is based on your lifelong credit history, it is difficult to significantly improve the number with quick fixes. You must appeal for the credit agency to remove any incorrect reporting from your credit report; this is really the only way to quickly improve your credit score.

How do I find out my credit score?

In order to raise your score, you've got to obtain the credit reports that are used to build it, and of course, you need the score itself. Fair Isaac, the corporation that invented the original FICO credit score, offers scores on its website: myFICO.com. It's inexpensive, fast, and easy to get your credit score as well as reports from all three agencies. Also available are information and tools that can help you understand how to improve your credit score.

You can get a federally-mandated free credit report once per year from all three credit reporting agencies when you visit 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 will be a more informed consumer and you'll be better positioned to obtain the right mortgage for you.

Want to know more about credit scores? Call us: (972) 818-0022.