FICO Credit Scores: What Do They Mean?
Since we live in a computer-driven world, it's probably not that surprising that your creditworthiness comes down to one number.
This score is built by credit agencies. These agencies use the payment history of your various loans: mortgages, car/motorcycle loans, credit cards, and the like.
TransUnion, Equifax, and Experian, the three major credit reporting agencies, each have a proprietary formula for building your 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, the differences aren't huge; all of the agencies use the following factors in building a credit score:
- Credit History - How many years have you had credit?
- Payment History - Do you have any payments later than 30 days?
- Credit Card Balances - How many accounts do you carry? How much do you owe on your accounts?
- Credit Inquiries - How many times have lenders pulled your credit for the purpose of lending you money?
These factors are weighted differently depending on which formula the agency uses. The results are added up and distilled into a single number. Credit scores range from 300 to 800. Higher is better. Most people getting a mortgage score 620 or above.
Credit scores make a huge difference in your interest rate
Did you know? 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
Is there any way to raise your FICO score? Because the credit score is based on your lifelong credit history, it's difficult to make a significant improvement in the number with quick fixes. (Of course you can and should appeal incorrect items on your credit report.)
Getting your credit score
In order to raise your FICO score, you've got to get the reports that are used to build it, and of course, you need the score itself. Fair Isaac, the company that offered the first FICO score, sells credit scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score along with credit reports from all three reporting agencies. They also provide helpful information and tools that help you improve your FICO score.
You can get a free credit report every year from all three credit reporting 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.
Armed with this information, you'll be a more informed consumer and you'll be better positioned to obtain the right mortgage for you.
Curious about credit scores? Call us at 952 417 8481.