FICO Credit Scores: What Do They Mean?

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Since our world is so computer-driven, it should come as no surprise that your creditworthiness comes down to one number. The FICO score is created by credit agencies. They use the payment history from all of your loans: mortgages, car loans, credit cards, et cetera.

The three agencies use slightly different formulas to build a credit score. Fair Isaac and Cooriginally developed this score. . Experian uses this model and calls its score FICO. Equifax's model, based on FICO, is called BEACON, while TransUnion, which also uses a slightly modified FICO, calls its score EMPIRICA. While these methods vary, the differences aren't huge; all of the agencies use the following factors to calculate a credit score:

• Credit History - How long have you had credit?
• History of Payments - Have you paid more than 30 days late?
• Your Credit Card Balances - How many accounts? How much do you owe on your accounts?
• Credit Inquiries - How many times have you had your credit checked for a loan?

Each of these factors is assigned a value and a weight. The results are added up and distilled into a single number. FICO scores range from 300 to 800. Higher is better. Most borrowers getting a mortgage loan in the current environment score 620 or above.

Not just for qualifying

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.

Raising your FICO score

Unfortunately, there isn't a lot you can do to immediately improve your credit score. Since the credit score is entirely based on your lifelong credit history, it's difficult to change it quickly. You should appeal for the credit agency to remove any incorrect reporting from your credit report; this is really the only "quick fix" for credit troubles.

Know your FICO

To raise your FICO score, you've got to have the reports that the agencies use to build it, and of course, you need the score itself. Fair Isaac, the corporation that offered the original FICO credit score, offers scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score along with reports from all three agencies. 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 federally-mandated free credit report once per year from the three major credit reporting agencies at AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it is fast and inexpensive.

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

Curious about credit scores? Give us a call: 516 536-2525.