How FICO Credit Scores Are Calculated

Since we live in an automated society, it should come as no surprise that your ability to repay your mortgage loan comes down to just one number. This score is compiled by credit reporting agencies. They use the payment history from all of your loans: credit cards, mortgages, car/boat loans and others.

Each of the three credit agencies has its own formula for building your credit score. The original FICO 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 each of the models considers a range of data available in your credit report, the differences aren't huge; all of the agencies use the following factors to calculate your score:

  • Your Credit History - How many years have you had credit?
  • History of Payments - Do you pay your bills on time?
  • Your Credit Card Balances - How many accounts do you have, and how much do you owe on them?
  • Inquiries on Your Credit - How many times have lenders pulled your credit report for the purpose of lending you money?

These factors are assigned weights based on the formula being used. The results are added up and distilled into a single number. Credit scores range from 300 to 800. Higher is always better. Typical home buyers likely find their credit scores above 620.

Your FICO score greatly 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 about your FICO score? Unfortunately, not much. Because the credit score is based on your lifelong credit history, it's hard to significantly improve the score with quick fixes. You should remove any incorrect reporting from your credit report; this is the only way to quickly improve your credit score.

Getting your credit score

To improve your score, you've got to get the credit reports that are used 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, fast, and easy to get your credit score as well as credit reports from all three credit reporting agencies. Also available are helpful 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 once a year from all three agencies at AnnualCreditReport.com. These reports do not include a free score, but it's very inexpensive to get one at the same time.

Now that you have all the facts, you'll be a more informed consumer and you'll be better positioned to obtain the right mortgage for you.

Curious about credit scores? Call us: (207) 571-8034.