FICO Credit Scores: What Do They Mean?
Since our world is so automated, you're probably not surprised to hear that your ability to repay virtually any loan boils down to a single number.
All the years you've been paying your various bills: your mortgage, car payments, and credit card bills can be analyzed, sliced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.
The three credit reporting agencies use slightly different formulas to build a credit score. The original FICO model was developed by Fair Isaac and Company.
While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While these methods vary, the differences aren't huge; they all use the following to build a credit score:
- Credit History - Have you had credit for years, or for just a short time?
- History of Payments - Have you paid more than 30 days late, and how often?
- Balances on your Credit Cards - How many credit card 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 is assigned a value and a weight. The results are added up and distilled into a single number. Credit scores can be as low as 300 and as high as 800. Higher is better. Most borrowers getting a mortgage these days have a score above 620.
FICO makes a big difference in your interest rate
Did you know? 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 raise my credit score?
Is there any way to improve your credit score? Some companies promise quick fixes, but they can't do anything different than what you can do — for free. You should, of course, remove any incorrect reporting from your credit report; this is the only "quick fix" for credit problems.
Know your FICO score
Before you can improve your credit score, you have to get your score and ensure that the reports from each reporting agency are correct. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. It's inexpensive, fast, and easy to get your credit score along with reports from all three agencies. Also available are information and online tools that can help you improve your credit score.
You can get a free credit report once a year from all three agencies at AnnualCreditReport.com. These reports do not include a free score, but it's very inexpensive to get one at the same time.
Armed with this information, you'll be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.
Want to know more about credit scores? Give us a call: 3103737406.