FICO Credit Scores: What Do They Mean?

Because our world is so automated, you're probably not surprised to hear that your creditworthiness comes down to one number. The FICO score is built by credit agencies. They use the payment history from your various loans: credit cards, mortgages, car/boat loans etcetera.

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 the formulas vary from one agency to another, the differences aren't huge; they all use the following to build your score:

• Your Credit History - How many years have you had credit?
• Late Payments - Do you have any payments later than 30 days?
• Balances on your Credit Cards - How many credit card accounts do you hold, and how much do you owe?
• Inquiries on Your Credit - How many times have lenders pulled your credit report for the purpose of lending you money?

Each of these factors is assigned a value and a weight. Each formula produces a single number which may vary slightly from one agency to another. FICO scores range from 300 to 800. Higher is always better. Most home buyers in the current environment have a score above 620.

Not just for qualifying

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.

Improving your score

Unfortunately, there isn't a lot you can do to immediately improve your credit score. Since the FICO score is based on a lifetime of credit history, it is hard to change it quickly. (Of course you must remove incorrect data on your credit report.)

How do I find out my credit score?

In order to improve your score, you must get the credit reports that the agencies use to build it. Of course, you need the score as well. Fair Isaac, the company that invented the original FICO credit score, sells FICO scores on myFICO.com. It's inexpensive to get your FICO from all three reporting agencies, along with your credit report. They also provide helpful information and 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 agencies when you visit AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is fast and very inexpensive.

Now that you have all the facts, you'll be a more informed consumer and you'll be better positioned to get the right mortgage for you.

Curious about credit scores? Call us: (818)645-7035.