How FICO Credit Scores Are Calculated

Since we live in an automated world, it's not surprising that your ability to repay your mortgage loan comes down to a single number. All the years you've been 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 reporting agencies use slightly different formulas to build a credit score. Fair Isaac and Cooriginally developed this score. . 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 each of the models considers a range of data available in your credit report, each agency uses the following to calculate your credit score:

  • Credit History - Have you had credit for years, or for a short time?
  • History of Payments - Have you paid more than 30 days late, and how often?
  • Balances on your Credit Cards - How many accounts do you hold, and how much do you owe on them?
  • Credit Inquiries - How many times have lenders pulled your credit for the purpose of lending you money?

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 is always better. Most home buyers have a score above 620.

Your credit score greatly affects how much you pay in interest every month

Did you know? Credit scores are used for more than just determining whether or not you qualify for a mortgage. Lenders give lower interest rates to individuals with higher scores.

Improving your score

What can you do to improve your FICO score? Very little in the short term. Despite what you hear from "credit repair" companies, the score is formulated from your lifelong credit history, so you can't turn it around right away. (Of course you can and should remove incorrect data on your credit report.)

How do I find out my FICO score?

Before you can improve your FICO score, you must know your score and be sure that the reports from each 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 along with credit reports from all three reporting agencies. Also available are 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 once per year from all three agencies when you visit AnnualCreditReport.com. These reports do not include a free credit score, but it's very inexpensive to get one at the same time.

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

Want to know more about your FICO score? Call us: 720-598-8300.

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