How's your FICO Score?
Because we live in a computer-driven society, you're probably not surprised to hear that your ability to repay your mortgage loan boils down to one number.
All the years you've been paying your various bills: your mortgage, car payments, and credit card bills are analyzed, sliced, diced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.
The three reporting agencies use slightly different formulas to build a credit score. The original FICO score 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 the formulas vary, all of the agencies use the following to build your credit score:
- Credit History - How many years have you had credit?
- Payment History - Do you pay your bills on time?
- Your Credit Card Balances - How many credit card accounts do you have, and how much do you owe?
- Requests for Credit - How many times have you had your credit checked for a loan?
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 is better. Most home buyers will likely find their scores falling between 620 and 800.
FICO makes a difference in your interest rate
Did you know? 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.
Raising your FICO score
Is there any way to improve your FICO score? Despite what you hear from "credit repair" companies, the FICO score is formulated from your lifelong credit history, so you can't turn it around right away. You must remove any incorrect data on your credit report; this is really the only "quick fix" for credit troubles.
How do I find out my FICO score?
Before you can improve your FICO score, you have to get your score and make sure that the reports from each credit reporting agency are correct. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. For a reasonable fee, you can quickly get your FICO from all three reporting agencies, along with your credit report. Also available are information and tools that help you analyze what actions might have the greatest impact on your FICO score.
You can get a free credit report once a year from the three major credit reporting agencies by visiting 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 will be a more informed consumer and you'll be better positioned to get the right mortgage for you.
Want to know more about credit scores? Give us a call at (973) 601-2122.