Your FICO score
FICO Credit Scores: What Do They Mean?
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Since we live in an automated, it’s probably not that surprising that your ability to repay your mortgage loan comes down to a single number. The years of paying your various bills: your mortgage, car payments, and credit card bills are analyzed, sliced, spindled and mutilated into a single indicator of whether you’re likely to meet your future obligations.
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 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 in calculating your credit score:
- Your Credit History – How long have you had credit?
- Payment History – Do you pay your bills on time?
- Your Credit Card Balances – How many accounts do you hold? How much do you owe?
- 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 a single number: your credit score. FICO scores range from 300 to 800. Higher is better. Most home buyers have a score above 620.
Your credit score greatly affects your interest rate
FICO scores affect more than your ability to get a loan. They also affect your interest rate. Higher scores indicate you are probably a better credit risk, and thus may qualify for a better mortgage rate.
Can I improve my credit score?
What can you do to improve your FICO score? Very little in the short term. Some companies promise quick fixes, but they can’t do anything different than what you can do — for free. (Of course you must have incorrect items removed from your credit report.)
Getting your credit score
Before you can improve your score, you have to 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. They also provide information and tools that help you understand how to improve your credit score.
You can get a federally-mandated free credit report every year from all three credit reporting agencies at AnnualCreditReport.com. You won’t get a free credit score from AnnualCreditReport.com, but getting it is fast and inexpensive.
Now that you have all the facts, you will be a more informed consumer and you’ll be better positioned to get the right mortgage for you.