How FICO Credit Scores Are Calculated

Because our society is so computer-driven, you're probably not surprised to hear that your ability to repay your mortgage boils down to one number. The years of paying your various bills: your mortgage, vehicle payments, and credit card bills are analyzed, 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. The original FICO score 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 each of the models considers a range of data available in your credit report, each agency uses the following to determine your score:

  • Your Credit History - Have you had credit for years, or for just a short time?
  • History of Payments - Do you pay your bills on time?
  • Balances on your Credit Cards - How many accounts do you have, and how much do you owe?
  • Credit Inquiries - How many times have you had your credit checked for a loan?

Each of these factors is assigned a value and a weight. Each formula produces a single number which may vary a a little from one agency to another. FICO scores range from 300 to 800. Higher is better. Most folks who want to get a mortgage score 620 or above.

Not just for qualifying

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.

Raising your FICO 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 based on 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 credit score?

Before you can improve your credit score, you must get your score and make sure that the credit reports from each agency are correct. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. For a reasonable fee, you can quickly get your FICO score from all three agencies, along with your credit report. Also available are helpful information and tools that help you improve your credit score.

You can get a federally-mandated free credit report every year from the three major credit reporting agencies at AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it is fast and inexpensive.

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

Curious about credit scores? Give us a call: 720-598-8300.

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