FICO Credit Scores: What Do They Mean?

Since we live in an automated society, it's not surprising that your ability to repay your mortgage boils down to a single number. The years of paying your various bills: your mortgage, car payments, and credit card bills are analyzed, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

TransUnion, Equifax, and Experian, the three major credit reporting agencies, each have a proprietary formula for building 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 these methods vary from one agency to another, the differences aren't huge; each agency uses the following factors to build a credit score:

  • Credit History - How long have you had credit?
  • Late Payments - Have you paid more than 30 days late?
  • Balances on your Credit Cards - How many accounts do you hold? How much do you owe on your accounts?
  • Inquiries on Your Credit - How many times have lenders pulled your credit report for the purpose of lending you money?

These factors are assigned weights based on the formula being used. Each formula produces a single number which varies slightly by agency. Credit scores range from 300 to 800. Higher scores are better. Most borrowers who want to get a mortgage loan in the current environment 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.

Can I raise my credit score?

Unfortunately, there isn't a lot you can do to immediately improve your credit score. So called "credit repair" companies advertise quick fixes, but the score is built on your lifetime credit history, so you can't turn it around right away. You should appeal for the credit agency to remove any incorrect reporting from your credit report; this is really the only way to quickly improve your credit score.

How do I find out my FICO score?

To improve your FICO score, you've got to get the credit reports that are used to build it. Of course, you need the score as well. Fair Isaac, the corporation that invented the original FICO credit score, offers scores on myFICO.com. For a reasonable fee, you can get your FICO score from all three agencies, along with your credit report. 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 every year from the three major 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.

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

Curious about credit scores? Call us: (310) 373-7406.

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