FICO Credit Scores: What Do They Mean?

Since we live in an computer-driven society, it's not surprising that your ability to repay your mortgage boils down to just one number. This score is created by credit agencies. They use the payment history of your various loans: credit cards, mortgages, car/boat loans and others.

Each of the three credit agencies has its own formula for building your credit score. The original FICO was developed by Fair Isaac and Company. 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 to build your score:

  • Your Credit History - How many years have you had credit?
  • History of Payments - Do you have any payments later than 30 days?
  • Credit Card Balances - How many accounts? How much do you owe on your accounts?
  • Requests for Credit - How many times have you had your credit checked for a loan?

Each of these is assigned a value and a weight. The result is one number. FICO scores range from 300 to 800. Higher is better. Most folks getting a mortgage loan these days score 620 or above.

FICO makes a big difference in interest rates

FICO 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.

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

Before you can improve your FICO score, you must get your score and make certain that the credit reports from each credit reporting 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 tools that can help you analyze what actions might have the greatest impact on your FICO score.

You can get a free credit report once a year from the three major credit reporting agencies by visiting 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.

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 credit scores? Give us a call: 610-565-3600.