You Credit Score- How's Your FICO?

Because we live in an automated world, it is not surprising that your ability to repay your mortgage loan boils down to just one number. Credit reporting agencies use your history of paying loans in order to compile a FICO score.

TransUnion, Equifax, and Experian, the three major credit agencies, each have their own proprietary formula for building a 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 the formulas vary from one agency to another, each agency uses the following to determine a credit score:

  • Credit History - How long have you had credit?
  • Late Payments - Do you have a history of late payments?
  • Your Credit Card Balances - How many credit card accounts do you hold, and how much do you owe?
  • Inquiries on Your Credit - How many times have lenders pulled your credit for the purpose of lending you money?

Each of these is assigned a value and a weight. 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 scores are better. Most home buyers these days have a score above 600.

Your score greatly affects your monthly payment

Did you know FICO 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.

Can I improve my FICO score?

Unfortunately, there is not a lot you can do to immediately improve your credit score. Because the score is based on a lifetime of credit history, it is hard to significantly improve the score with quick fixes. You should, of course, remove any incorrect reporting from your credit report, which is the only "quick fix" for credit problems.

There are other abilities you have to improve your scores.  Some examples would be:
    Avoid late payments
    Keep your credit cards below 30% balances
    Pay more than the minimum payment
    Open small limit balance credit cards with existing relationships if you have never been late with that creditor
    
Keep trade lines (credit lines) open, even if you no longer utilize the credit card--the longer the history on
    your credit, the better the score
    Avoid credit inquiries on your report

Know your FICO

Before you can improve your score, you have to obtain your score and be sure that the credit reports from each credit reporting agency are correct. Fair Isaac, the corporation that invented the original FICO score, sells FICO scores on its website: myFICO.com. For a reasonable fee, you can quickly get your FICO from all three agencies, along with your credit report. They also provide information and online tools that help you analyze what actions might have the greatest impact on your FICO score.

You can get a federally-mandated free credit report every year from all three credit reporting agencies by visiting AnnualCreditReport.com. While this report does not include a free credit score, the cost to "upgrade" your report to include a credit score is very reasonable.

Armed with this info, you will be a more informed consumer, and you will be better positioned to obtain the right mortgage for you.

Want to know more about your credit score? Give us a call at 330-492-7757.