How FICO Credit Scores Are Calculated

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Since our world is so automated, it should come as no surprise that your creditworthiness boils down to one number. The FICO score is compiled by credit agencies. They use the payment history of your various loans: mortgages, car/motorcycle loans, credit cards, and the like.

Each of the three credit agencies has its own formula for building your 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, all of the agencies use the following to determine your credit score:

  • Credit History - Have you had credit for many years, or for a short time?
  • Late Payments - Do you pay your bills on time?
  • Balances on your Credit Cards - How many accounts? How much do you owe on your accounts?
  • Inquiries on Your Credit - How many times have you had your credit checked for a loan?

These factors are weighted a little bit differently depending on the formula being used. The results are added up and distilled into a single number. FICO scores can be as low as 300 and as high as 800. Higher is better. Most home buyers in the current environment have a score above 620.

Your score affects your monthly payment

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 FICO score?

How can you improve your FICO score? Since the FICO score is entirely based on your lifelong credit history, it's very difficult to change it quickly. You should, of course, appeal for the credit agency to remove any incorrect reporting on your credit report; this is the only way to quickly improve your credit score.

Know your FICO

To raise your FICO score, you must get the 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 to quickly get your FICO from all three reporting agencies, along with your credit report. Also available are information and tools that can help you improve your FICO score.

You can get a free credit report once per year from all three credit reporting agencies by visiting AnnualCreditReport.com. These reports do not include a free credit 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 right mortgage for you.

Curious about your FICO score? I can send you a FREE 20 page booklet called Understanding Your FICO Score Booklet. Just fill out the form below or call me at Office: (856) 988-8100 x3015 or Cell (609-513-0872 and I will send it out to you immediately.

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