Since we live in an automated society, it should come as no surprise that your ability to repay your mortgage comes down to just one number. Credit reporting agencies use your payment history in order to compile a FICO® score.
Experian, TransUnion, and Equifax, the three major credit reporting agencies, each have their own proprietary formula for building your credit score. Fair Isaac and Cooriginally developed this score. . Experian uses this model and calls its score FICO®. Equifax's model, based on FICO®, is called BEACON, while TransUnion, which also uses a slightly modified FICO®, calls its score 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 your credit score:
- Your Credit History - How long have you had credit?
- Payment History - Do you have any payments later than 30 days?
- Your Credit Card Balances - How many accounts? How much do you owe on your accounts?
- Inquiries on Your Credit - How many times have lenders pulled your credit report for the purpose of lending you money?
These factors are assigned weights based on the formula being used. The result is a single number: your FICO® score. Credit scores can be as low as 300 and as high as 800. Higher is better. Most home buyers in the current environment have a score above 620.
Credit scores make a big difference in your interest rate
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.
Improving your score
Unfortunately, there isn't a lot you can do to immediately improve your credit score. So called "credit repair" companies advertise quick fixes, but the FICO® score is based on your lifelong credit history, so it's not possible to raise it significantly in the short term. (Of course you can and should remove incorrect data on your credit report.)
Getting your credit score
To raise your credit score, you've got to obtain the credit reports that the agencies use to build it. Of course, you need the score as well. 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. They also provide helpful information and online tools that help you analyze what actions might have the greatest impact on your FICO® score.
You can get a free credit report every year from all three agencies when you visit 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.
Now that you have all the facts, you'll be a more informed consumer and you'll be better positioned to get the most favorable mortgage.
Looking for mortgage advice? Want to know more about credit scores? We will be glad to help! Give us a call: (209) 470-7161 or complete the form below.
FICO® is a registered trademark of Fair Isaac Corporation.
