FICO Credit Scores: What Do They Mean?

Because our society is so computer-driven, you're probably not surprised to hear that your ability to repay virtually any loan comes down to a single number. The FICO score is built by credit agencies. They use the payment history from all of your loans: credit cards, mortgages, car loans and others.

All three credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a score. The original FICO score was developed by Fair Isaac and Company. 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 the formulas vary, the differences aren't huge; all of the agencies use the following in calculating a credit score:

  • Your Credit History - How long have you had credit?
  • Payment History - Do you have any payments later than 30 days?
  • Credit Card Balances - How many accounts? How much do you owe on your accounts?
  • Requests for Credit - How many times have lenders pulled your credit report for the purpose of giving you a loan?

These factors are assigned weights based on the formula being used. The results are added up and distilled into a single number. Credit scores can be as low as 300 and as high as 800. Higher is better. Most home buyers these days have a score above 620.

Your score affects your interest rate

Did you know? 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.

Improving your score

What can you do to improve your FICO score? Very little in the short term. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. You should remove any incorrect reporting on your credit report; this is the only way to quickly improve your credit score.

Getting your credit score

To raise your credit score, you must obtain the credit reports that the agencies use to build it. Of course, you need the score as well. Fair Isaac, the corporation that invented the original FICO score, sells credit scores on its website: myFICO.com. For a reasonable fee, you can get your FICO score from all three agencies, along with your credit report. 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 per year from the three major agencies by visiting 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 information, you'll be a more informed consumer and you'll be better positioned to get the right mortgage for you.

Curious about credit scores? Give us a call: 5617752724.