How FICO Credit Scores Are Calculated
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Since we live in an automated society, it's not surprising that your ability to repay your mortgage loan boils down to just one number. The FICO score is compiled by credit reporting agencies. They use the payment history from your various loans: credit cards, mortgages, car/boat loans and others.
Each of the three credit reporting agencies has its own formula for building your 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 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 in calculating a score:
- Credit History - Have you had credit for years, or for just a short time?
- History of Payments - Have you paid more than 30 days late?
- Balances on your Credit Cards - How many accounts do you have? How much do you owe on your accounts?
- Credit Inquiries - 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. Each formula produces a single number which may vary a a little by agency. FICO scores range from 300 to 850. Higher scores are better. Most borrowers getting a mortgage loan in the current environment score 640 or above.
Your score affects how much you pay in interest every month
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 to raise your FICO score?
- Try to keep your revolving credit card balances at or below 30% of the credit limit. If you can maintain a balance below 30%, then at least have a goal to get the balance below 50% of the limit.
- Do not close a credit card account just because you've managed to pay it off. It is very important to keep your accounts open and active. However, if you have 10 credit card accounts and they have all been open for the same amount of time, it will not hurt your score if you choose to close 4 or 5 of the less desirable accounts.
- Do not payoff an old collection account just before you get ready to purchase a home. It is not that we do not feel you need to settle any old collection accounts, but if you were to pay that OLD collection account just before we pull your credit, your score will most likely be damaged because you've just turned an old collection account into a Recent collection account. In most cases, it is acceptable for the debt to be paid at the closing. *** Once we pull your credit and if we notice a collection account that reported within the last 6 months, often times we will recommend that you pay that collection account as soon as possible and get it reported to the appropriate credit bureaus for a credit score increase. Remember, the more recent the derogatory activity, the more of a negative impact to your credit score.
- Keep a balance on credit cards. Believe it or not, I have seen many borrower's credit scores be lowered because they NO balance on their revolving account. With the new scoring models, it is now helpful to carry even a $20 balance vs a $0 balance.
Know your FICO score
To raise your score, you must get the credit reports that are used to build it. Of course, you need the score as well. Fair Isaac, the corporation that offered the first FICO credit score, offers scores on myFICO.com. For a reasonable fee, you can quickly get your FICO from all three reporting agencies, along with your credit report. They also provide information and 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 every year from the three major credit reporting agencies when you visit AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it is quick and very inexpensive.
If you'd like additional information on how to improve your credit scores, be sure to visit my page at http://www.kathydelbridge.com/ImproveYourCredit. You are sure to gain some invaluable information to assist your on your path to maintaining higher credit scores.
Now that you have all the facts, you will be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.