Since we live in an computer-driven world, it’s not surprising that your ability to repay your mortgage loan comes down to just one number. Credit reporting agencies use your history of paying all types of loans in order to compile this score.
Each of the three credit reporting agencies has its own formula for building your credit score. Fair Isaac and Company originally 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, the differences aren’t huge; they all use the following factors to calculate your score:
- Credit History – How long have you had credit?
- Payment History – Have you paid more than 30 days late?
- Balances on your Credit Cards – How many accounts do you carry? How much do you owe on your accounts?
- Requests for Credit – How many times have lenders pulled your credit report for the purpose of lending you money?
Each of these factors is assigned a value and a weight. Each formula produces a single number which may vary a a little by agency. Credit scores can be as low as 300 and as high as 850. Higher is always better. Most home buyers have a score above 620.
Not just for qualifying
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.
Can I raise my FICO score?
Is there any way to improve your FICO score? Some companies promise quick fixes, but they can’t do anything different than what you can do — for free. (Of course you must appeal incorrect items on your credit report.)
Know your FICO
Before you can improve your score, you must know your score and be sure that the credit reports from each 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. Also available are helpful information and tools that help you analyze what actions might have the greatest impact on your FICO score.
Armed with this information, you’ll be a more informed consumer and you’ll be better positioned to obtain the right mortgage for you.