FICO Credit Scores: What Do They Mean?
Because we live in an automated, it's probably not that surprising that your ability to repay virtually any loan boils down to a single number.
The FICO score is created by credit reporting agencies. These agencies use the payment history of all of your loans: credit cards, mortgages, car loans etcetera.
All three major credit agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a 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 these methods vary, each agency uses the following to determine a credit score:
- Credit History - How long have you had credit?
- History of Payments - Do you have any payments later than 30 days?
- 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 lenders pulled your credit for the purpose of giving you a loan?
These factors are weighted slightly differently depending on which formula the agency uses. The result is one number. Credit scores can be as low as 300 and as high as 800. Higher is better. Most home buyers have a score above 620.
FICO makes a 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. Lenders give lower interest rates to individuals with higher scores.
Can I improve my credit score?
Unfortunately, there isn't a lot you can do to immediately improve your credit score. Despite what you hear from "credit repair" companies, the FICO score is calculated from your lifelong credit history, so it's not possible to raise it significantly in the short term. You should appeal for the credit agency to remove any incorrect data from your credit report, which is the only way to quickly improve your credit score.
Know your FICO score
To raise your score, you must have the reports that the agencies use to build it, and of course, you need the score itself. Fair Isaac, the company that offered the first FICO score, offers FICO scores on its website: myFICO.com. For a reasonable fee, you can quickly get your FICO score from all three agencies, along with your credit report. Also available are 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 every year from the three major credit reporting agencies when you visit AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is quick and very inexpensive.
Now that you have all the facts, you will be a more informed consumer and you'll be better positioned to get the most favorable mortgage.
Want to know more about credit scores? Give us a call: (773) 774-9040 Ext 121.