Since we live in an computer-driven society, it should come as no surprise that your ability to repay your mortgage loan boils down to just one number. All the years you’ve been paying your various bills: your mortgage, car payments, and credit card bills can be analyzed, sliced, spindled and mutilated into a single indicator of whether you’re likely to meet your future obligations.
The three 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, each agency uses the following to build a credit score:
- Credit History – How many years have you had credit?
- Payment History – Do you pay your bills on time?
- Your Credit Card Balances – How many accounts do you have? How much do you owe?
- Inquiries on Your Credit – How many times have lenders pulled your credit for the purpose of giving you a loan?
These factors are weighted slightly differently depending 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 home buyers these days have a score above 620.
Your score affects how much you pay in interest every month
Did you know? 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.
Raising your 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 formulated from your lifelong credit history, so you can’t turn it around right away. (Of course you can and should remove incorrect data on your credit report.)
How do I find out my credit score?
Before you can improve your FICO score, you have to know your score and make sure that the credit reports from each credit reporting agency are correct. 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 reports from all three agencies. They also provide helpful information and tools that help you improve your credit score.
You can get a federally-mandated free credit report once a year from the three major agencies when you visit AnnualCreditReport.com. You won’t get a free credit score from AnnualCreditReport.com, but getting one is fast and inexpensive.
Armed with this info, you’ll be a more informed consumer and you’ll be better positioned to obtain the right mortgage for you.