Scoring your Credit - How's your FICO?
Since we live in an computer-driven world, it should come as no surprise that your ability to repay your mortgage comes down to just one number. This score is compiled by credit agencies. These agencies use the payment history from your various loans: mortgages, car/motorcycle loans, credit cards, and others.
All three credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a score. Fair Isaac and Cooriginally developed this score. . While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While each of the models considers a range of data available in your credit report, each agency uses the following to determine a credit score:
- Credit History - How many years have you had credit?
- History of Payments - Have you paid more than 30 days late?
- Credit Card Balances - How many accounts do you hold, and how much do you owe on them?
- Inquiries on Your Credit - How many times have lenders pulled your credit for the purpose of giving you a loan?
These factors are weighted a little bit differently depending on the formula being used. The result is one number. Credit scores range from 300 to 850. Higher is always better. Most home buyers have a score above 620.
Your FICO score affects your interest rate
FICO scores affect more than your ability to get a loan. They also affect your interest rate. Higher scores indicate you are probably a better credit risk, and thus may qualify for a better mortgage rate.
Can I improve my credit score?
Is there any way to improve your credit score? Despite what you hear from "credit repair" companies, the score is calculated from your lifetime credit history, so you can't turn it around right away. (Of course you can and should remove incorrect data on your credit report.)
How do I find out my FICO score?
Before you can improve your credit score, you must get your score and be sure that the credit reports from each credit reporting agency are correct. 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 reporting agencies. They also provide information and tools that help you understand how to improve your credit score.
You can get a free credit report once a year from all three agencies when you visit 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 obtain the most favorable mortgage.