How FICO Credit Scores Are Calculated

Since we live in an automated society, it's not surprising that your ability to repay your mortgage loan comes down to a single number. This score is built by credit reporting agencies. These agencies use the payment history from all of your loans: credit cards, mortgages, car loans and the like.

All three credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a score. The original FICO model was developed by Fair Isaac and Company. While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While these methods vary, each agency uses the following to calculate your score:

• Credit History - Have you had credit for years, or for a short time?
• Late Payments - Do you pay your bills on time?
• Credit Card Balances - How many accounts do you carry? How much do you owe?
• Inquiries on Your Credit - How many times have you had your credit checked for a loan?

These factors are weighted differently depending on the formula being used. The result is one number. FICO scores can be as low as 300 and as high as 800. Higher is always better. Most home buyers in the current environment have a score above 620.

Not just for qualifying

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.

Can I improve my credit 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. You must, of course, remove any incorrect reporting from your credit report; this is the only way to quickly improve your credit score.

Getting your FICO score

To improve your FICO score, you've got to obtain the reports that are used to build it, and of course, you need the score itself. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. It's inexpensive, fast, and easy to get your credit score along with credit reports from all three reporting agencies. Also available are helpful information and tools that can help you understand how to improve your credit score.

You can get a free credit report every year from the three major agencies at AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it is quick and inexpensive.

Now that you have all the facts, you will be a more informed consumer and you'll be better positioned to obtain the right mortgage for you.