You Credit Score: How's Your FICO?
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Since we live in an computer-driven society, it's not surprising that your ability to repay your mortgage loan comes down to just one number. The FICO score is compiled by credit reporting agencies. These agencies use the payment history of your various loans: credit cards, mortgages, car/boat loans and others.
Equifax, TransUnion, and Experian, the three major credit reporting agencies, each have a proprietary formula for building a credit score. The original FICO score was developed by Fair Isaac and Company. While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While each of the models considers a range of data available in your credit report, the differences aren't huge; each agency uses the following in building a score:
- Credit History - Have you had credit for many years, or for a short time?
- Late Payments - Do you have a history of late payments?
- Balances on your Credit Cards - How many accounts do you hold, and how much do you owe on them?
- Requests for Credit - How many times have lenders pulled your credit report for the purpose of lending you money?
These factors are weighted a little bit differently depending on which formula the agency uses. The result is a single number: your credit score. Credit scores can be as low as 300 and as high as 800. Higher scores are better. Typical home buyers likely find their scores between 620 and 800.
Not just for qualifying
FICO scores affect more than your ability to get a loan. They also affect your interest rate. Lenders give lower interest rates to individuals with higher scores.
Raising your FICO score
Is there any way to improve your FICO score? Despite what you hear from "credit repair" companies, the FICO score is based on your lifetime credit history, so you can't turn it around right away. (Of course you must appeal incorrect items on your credit report.)
Know your FICO
To improve your FICO score, you must have the reports that the agencies use to build it, and of course, you need the score itself. 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 as well as credit reports from all three agencies. They also provide information and online tools that help you analyze what actions might have the greatest impact on your FICO score.
You can get a 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 one is fast and very inexpensive.
Armed with this information, you will be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.