How FICO Credit Scores Are Calculated

Since we live in a computer-driven society, you're probably not surprised to hear that your ability to repay virtually any loan boils down to a single number. Credit reporting agencies use your payment history in order to build this score.

Each of the three credit agencies has its own formula for building your credit score. The original FICO model 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, the differences aren't huge; they all use the following to calculate your credit score:

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

Each of these is assigned a value and a weight. Each formula produces a single number which may vary a a little by agency. Credit scores range from 300 to 800. Higher is better. Most home buyers in the current environment have a score above 620.

Your score affects your interest rate

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.

Raising your credit score

Unfortunately, there isn't a lot you can do to immediately improve your credit score. Because the FICO score is entirely based on your lifelong credit history, it's hard to change it quickly. (Of course you can and should appeal incorrect items on your credit report.)

How do I find out my credit score?

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

You can get a federally-mandated free credit report every year from the three major 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.

Armed with this info, you will be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.

Want to know more about credit scores? Give us a call at 610-565-3600.