How FICO Credit Scores Are Calculated

Since we live in an computer-driven society, it should come as no surprise that your ability to repay your mortgage boils down to a single number. Credit reporting agencies use your history of paying all types of loans to create this score.

TransUnion, Equifax, and Experian, the three major credit reporting agencies, each have a proprietary formula for building 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 the formulas vary, each agency uses the following to determine a score:

  • Credit History - How long have you had credit?
  • Late Payments - Do you have any payments later than 30 days?
  • Credit Card Balances - How many credit card accounts do you have, and how much do you owe on them?
  • Inquiries on Your Credit - 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. FICO scores range from 300 to 800. Higher is better. Typical home buyers probably find their FICO scores between 620 and 800.

Your credit score affects your monthly payment

Credit scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are probably a better credit risk, and thus may qualify for a better mortgage rate.

Can I improve my FICO score?

Is it possible to improve your FICO score? Despite what you hear from "credit repair" companies, the FICO score is formulated from your lifetime credit history, so you can't turn it around right away. (Of course you must appeal incorrect items on your credit report.)

How do I find out my credit score?

To raise your FICO score, you've got to 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 first FICO credit score, offers FICO scores on its website: 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 online tools that help you analyze what actions might have the greatest impact on your FICO score.

You can get a federally-mandated free credit report once a year from all three credit reporting agencies at AnnualCreditReport.com. While this report does not include a free credit score, the cost to "upgrade" your report to include a credit score is very reasonable.

Armed with this info, you will be a more informed consumer and you'll be better positioned to get the most favorable mortgage.

Curious about your credit score? Give us a call at 512-302-9410.

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