About the FICO Credit Score
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Because our society is so automated, you're probably not surprised to hear that your ability to repay virtually any loan boils down to one number. The FICO score is created by credit agencies. These agencies use the payment history from your various loans: credit cards, mortgages, car loans and others.
All three major credit agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a 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 each of the models considers a range of data available in your credit report, the differences aren't huge; each agency uses the following in calculating a score:
- Your Credit History - Have you had credit for years, or for a short time?
- Payment History - Do you have a history of late payments?
- Balances on your Credit Cards - How many accounts do you have, and how much do you owe on them?
- Requests for Credit - How many times have lenders pulled your credit for the purpose of giving you a loan?
These factors are assigned weights based on the formula being used. Each formula produces a single number which varies slightly from one agency to another. Credit scores range from 300 to 850. Higher is better. Most people who want to get a mortgage loan score 620 or above.
Your FICO score greatly affects your monthly payment
FICO scores are used for more than just determining whether or not you qualify for a mortgage. Lenders give lower interest rates to individuals with higher scores.
Improving your 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 have incorrect items removed from your credit report.)
Know your FICO
In order to raise your FICO score, you've got to obtain the credit reports that are used to build it, and of course, you need the score itself. Fair Isaac, the company that invented the first FICO credit score, offers credit scores on its website: myFICO.com. For a reasonable fee, you can quickly get your FICO score from all three reporting agencies, along with your credit report. They also provide helpful information and online tools that can 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 credit reporting agencies at 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 information, you will be a more informed consumer and you'll be better positioned to obtain the right mortgage for you.