How's your FICO Score?
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Since we live in an computer-driven society, it's not surprising that your ability to repay your mortgage boils down to a single number.
Credit reporting agencies use your history of paying all types of loans to compile this score.
The three credit reporting agencies use slightly different formulas to build a credit 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 from one agency to another, each agency uses the following to calculate a score:
- Credit History - Have you had credit for many years, or for just a short time?
- History of Payments - Do you have any payments later than 30 days?
- Balances on your Credit Cards - How many accounts? How much do you owe?
- Inquiries on Your Credit - How many times have lenders pulled your credit for the purpose of lending you money?
Each of these factors 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 850. Higher scores are better. Most borrowers getting a mortgage these days have a score above 620.
Credit scores make a big difference in interest rates
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.
Can I raise my credit score?
Unfortunately, there isn't a lot you can do to immediately improve your credit score. Despite what you hear from "credit repair" companies, the score is built on your lifetime credit history, so it's not possible to raise it significantly in the short term. (Of course you must have incorrect items removed from your credit report.)
Getting your credit score
Before you can improve your credit score, you must know your score and make sure that the reports from each reporting agency are correct. Fair Isaac, the company that offered the original FICO score, offers scores on its website: myFICO.com. It's inexpensive to get your FICO from all three agencies, along with your credit report. They also provide helpful 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 per year from all three credit reporting agencies when you visit AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it is fast and inexpensive.
Armed with this information, you will be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.
Want to know more about credit scores? Give us a call at 1-844-MBROKER (1-844-627-6537).