Because we live in an automated world, it should come as no surprise that your creditworthiness boils down to a single number. Credit reporting agencies use your history of paying all types of loans in order to build this score.
The three credit reporting agencies use slightly different formulas to build a 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, the differences aren't huge; they all use the following to calculate your score:
These factors are assigned weights based on the formula being used. Each formula produces a single number which varies slightly from one agency to another. FICO scores can be as low as 300 and as high as 800. Higher is always better. Most people getting a mortgage have a score above 620.
Credit scores make a big difference in interest rates
Credit scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are a better credit risk, and thus may qualify for a better mortgage rate.
Can I improve my FICO score?
Unfortunately, there isn't a lot you can do to immediately improve your credit score. Since the score is entirely based on your lifelong credit history, it's very difficult to change it quickly. You should, of course, remove any incorrect reporting on your credit report, which is the only "quick fix" for credit troubles.
How do I find out my FICO score?
Before you can improve your FICO score, you must know your score and make sure that the credit reports from each credit reporting agency are correct. Fair Isaac, the company that offered the original FICO score, offers credit scores on its website: myFICO.com. For a reasonable fee, you can get your FICO score from all three reporting agencies, along with your credit report. They also provide helpful information and tools that can help you analyze what actions might have the greatest impact on your FICO score.
You can get a free credit report once a year from all three credit reporting agencies at AnnualCreditReport.com. While this report does not include a free credit score, the cost to "upgrade" your report to include a credit score is very reasonable.
Armed with this information, you will be a more informed consumer and you'll be better positioned to obtain the right mortgage for you.
Curious about your credit score? Give us a call: 302.227.4747.