FICO Credit Scores: What Do They Mean?

Since we live in a computer-driven world, it should come as no surprise that your creditworthiness boils down to one number. All the years you've been paying your various bills: your mortgage, vehicle payments, and credit card bills can be analyzed, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

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 the formulas vary, all of the agencies use the following to calculate your score:

  • Credit History - How many years have you had credit?
  • Late Payments - Do you have any payments later than 30 days?
  • Credit Card Balances - How many accounts? How much do you owe on your accounts?
  • Credit Inquiries - How many times have you had your credit checked for a loan?

These factors are weighted differently depending on the formula being used. Each formula produces a single number which varies slightly by agency. FICO scores can be as low as 300 and as high as 800. Higher is always better. Most home buyers these days have a score above 620.

FICO makes a big difference in interest rates

Did you know? Credit 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.

Can I improve my FICO score?

Unfortunately, there isn't a lot you can do to immediately improve your credit score. Since the FICO score is based on your lifelong credit history, it is hard to make a significant improvement in the number with quick fixes. (Of course you can and should have incorrect items removed from your credit report.)

Know your FICO score

To raise your credit 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, the company that invented the original FICO score, offers FICO scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score as well as credit reports from all three agencies. Also available are information and online tools that can help you improve your FICO score.

You can get a federally-mandated free credit report every year from all three agencies when you visit AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is fast and very inexpensive.

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 your credit score? Call us at 248-644-1200.

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