How FICO Credit Scores Are Calculated

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Since we live in an computer-driven society, it's not surprising that your ability to repay your mortgage boils down to a single number. This score is compiled by credit agencies. They use the payment history from your various loans: mortgages, car/motorcycle loans, credit cards, and the like.

Equifax, TransUnion, and Experian, the three major credit reporting agencies, each have their own proprietary formula for building your 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 these methods vary, the differences aren't huge; they all use the following factors to calculate your score:

  • Your Credit History - Have you had credit for many years, or for just a short time?
  • Payment History - Do you pay your bills on time?
  • Balances on your Credit Cards - How many accounts do you have, and how much do you owe on them?
  • Requests for Credit - How many times have lenders pulled your credit report for the purpose of giving you a loan?

Each of these is assigned a value and a weight. Each formula produces a single number which varies slightly from one agency to another. FICO scores can be as low as 300 and as high as 850. Higher scores are better. Most home buyers have a score above 620.

Your FICO score greatly 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 a better credit risk, and thus may qualify for a better mortgage rate.

Improving your score

Is it possible to raise your credit score? Since the credit score is entirely based on a lifetime of credit history, it's difficult to change it quickly. (Of course you can and should appeal incorrect items on your credit report.)

How do I find out my credit score?

To improve your score, you must have the 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 credit scores on its website: myFICO.com. It's inexpensive, fast, and easy to get your credit score as well as credit reports from all three credit reporting agencies. Also available are helpful information and tools that help you improve your FICO score.

You can get a free credit report once a year from all three agencies at AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it is quick and very inexpensive.

Now that you have all the facts, 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 405.823.5961.

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