Scoring your Credit - How's your FICO?
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Because we live in a computer-driven society, it's probably not that surprising that your ability to repay virtually any loan boils down to a single number.
Credit reporting agencies use your loan payment history in order to build a FICO score.
Each of the three credit reporting agencies has its own formula for building your 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 these methods vary, all of the agencies use the following to calculate your credit score:
- Credit History - How long have you had credit?
- Payment History - Do you have a history of late payments?
- Your Credit Card Balances - How many accounts? How much do you owe?
- Inquiries on Your Credit - How many times have lenders pulled your credit for the purpose of lending you money?
Each of these is assigned a value and a weight. The result is a single number: your FICO score. Credit scores can be as low as 300 and as high as 850. Higher is better. Most home buyers probably find their FICO scores falling above 620.
Your credit score affects how much you pay in interest every month
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
What can you do to improve your FICO score? Very little in the short term. So called "credit repair" companies advertise quick fixes, but the score is formulated from your lifelong credit history, so it's not possible to raise it significantly in the short term. You must remove any incorrect data on your credit report; this is the only "quick fix" for credit troubles.
Getting your credit score
Before you can improve your score, you must know your score and make sure that the credit reports from each credit reporting agency are correct. Fair Isaac, the corporation that offered the original FICO score, sells credit scores on its website: myFICO.com. It's inexpensive, fast, and easy to get your credit score as well as credit reports from all three reporting agencies. They also provide information and 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 a year from all three credit reporting agencies by visiting AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it is fast and very inexpensive.
Now that you have all the facts, you will be a more informed consumer and you'll be better positioned to get the most favorable mortgage.
Curious about your FICO score? Give us a call: 512-669-5599.