How FICO Credit Scores Are Calculated

Because our society is so automated, you're probably not surprised to hear that your ability to repay your mortgage loan comes down to a single number. The FICO score is compiled by credit agencies. These agencies use the payment history from your various loans: mortgages, car/motorcycle loans, credit cards, etcetera.

Equifax, TransUnion, 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 these methods vary, all of the agencies use the following to calculate a credit score:

  • Your Credit History - Have you had credit for years, or for a short time?
  • Late Payments - Do you pay your bills on time?
  • Your Credit Card Balances - How many accounts do you have? 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?

These factors are assigned weights based on the formula being used. The results are added up and distilled into a single number. FICO scores range from 300 to 800. Higher is better. Most home buyers have a score above 620.

Your score greatly affects your interest rate

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?

What can you do to improve your FICO score? Unfortunately, not much. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. (Of course you must have incorrect items removed from your credit report.)

How do I find out my credit score?

In order to raise your FICO score, you've got to obtain the credit reports that the agencies use to build it. Of course, you need the score as well. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. It's inexpensive, fast, and easy to get your credit score as well as credit reports from all three agencies. Also available are information and online tools that can 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 the three major agencies at AnnualCreditReport.com. These reports do not include a free score, but it's very inexpensive to get one at the same time.

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

Want to know more about your FICO score? Call us: 405-513-7700.

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