FICO Credit Scores: What Do They Mean?
Because our society is so computer-driven, it's probably not that surprising that your ability to repay virtually any loan boils down to a single number.
Credit reporting agencies use your history of paying all types of loans to create this score.
The three agencies use slightly different formulas to build a credit score. The original FICO 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 factors to build your score:
- Your Credit History - Have you had credit for many years, or for just a short time?
- History of Payments - Have you paid more than 30 days late?
- Balances on your Credit Cards - How many accounts? How much do you owe?
- Credit Inquiries - How many times have you had your credit checked for a loan?
These factors are assigned weights based on the formula being used. The result is a single number: your credit score. Credit scores can be as low as 300 and as high as 800. Higher is better. Most home buyers these days have a score above 620.
FICO makes a big difference in interest rates
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. Because the score is based on your lifelong credit history, it's hard to change it quickly. You should, of course, remove any incorrect reporting from your credit report, which is the only "quick fix" for credit troubles.
Know your FICO score
To improve your credit score, you've got to have the reports that the agencies use to build it. Of course, you need the score as well. Fair Isaac, the corporation that invented the first FICO credit score, sells FICO scores on myFICO.com. It's inexpensive to quickly get your FICO score from all three reporting agencies, along with your credit report. They also provide helpful information and online tools that can help you improve your credit score.
You can get a federally-mandated free credit report once per year from all three credit reporting agencies by visiting 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 will be a more informed consumer and you'll be better positioned to obtain the right mortgage for you.
Want to know more about your FICO score? Give us a call at (773) 774-9040 Ext 121.