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 boils down to a single number. Credit reporting agencies use your history of paying all types of loans to create this score.

Equifax, TransUnion, and Experian, the three major credit reporting agencies, each have their own proprietary formula for building a credit score. Fair Isaac and Cooriginally developed this score. . While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While the formulas vary, each agency uses the following to calculate a credit score:

  • Your Credit History - Have you had credit for years, or for a short time?
  • Payment History - Do you have a history of late payments?
  • Balances on your Credit Cards - How many accounts do you hold? How much do you owe on your accounts?
  • Requests for Credit - How many times have lenders pulled your credit for the purpose of giving you a loan?

These factors are weighted slightly differently depending on the formula being used. The results are added up and distilled into a single number. Credit scores range from 300 to 800. Higher scores are better. Most home buyers in the current environment have a score above 620.

Your FICO score greatly affects your monthly payment

Did you know? FICO 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? Unfortunately, not much. 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 FICO score, you must know your score and make sure that the reports from each agency are correct. Fair Isaac, the corporation that offered the original FICO score, sells scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score as well as reports from all three credit reporting agencies. Also available are helpful information and tools that can help you understand how to improve your credit score.

You can get a free credit report once a year from all three 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 get the most favorable mortgage.

Curious about your FICO score? Give us a call at (303) 650-9400.

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