FICO Credit Scores: What Do They Mean?

Since our society is so automated, it should come as no surprise that your creditworthiness comes down to one number. The FICO score is compiled by credit reporting agencies. They use the payment history of all of your loans: mortgages, car/motorcycle/boat loans, credit cards, 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. While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While each of the models considers a range of data available in your credit report, all of the agencies use the following to calculate a score:

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

These factors are weighted a little bit differently depending on which formula the agency uses. Each formula produces a single number which varies slightly by agency. Credit scores can be as low as 300 and as high as 800. Higher scores are better. Most folks getting a mortgage these days have a score above 620.

Credit scores make a huge 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.

Improving your score

Unfortunately, there isn't a lot you can do to immediately improve your credit score. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. You should appeal for the credit agency to remove any incorrect reporting on your credit report; this is really the only way to quickly improve your credit score.

Know your FICO

Before you can improve your FICO score, you must obtain your score and make sure that the credit reports from each 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 get your FICO score from all three agencies, along with your credit report. Also available are helpful information and online tools that help you improve your credit score.

You can get a free credit report once per 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 one is fast and very inexpensive.

Armed with this information, you'll be a more informed consumer and you'll be better positioned to obtain the right mortgage for you.

Curious about your FICO score? Give us a call: (317) 288-9434.

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