How FICO Credit Scores Are Calculated

Since we live in an automated society, it should come as no surprise that your ability to repay your mortgage boils down to a single number. All the years you've been paying your various bills: your mortgage, car payments, and credit card bills can be analyzed, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

Each of the three credit reporting agencies has its own formula for building your 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, the differences aren't huge; they all use the following factors to calculate a credit score:

• Your Credit History - How many years have you had credit?
• Late Payments - Have you paid more than 30 days late, and how often?
• Credit Card Balances - How many accounts do you hold, and how much do you owe?
• Credit Inquiries - 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 one number. Credit scores can be as low as 300 and as high as 850. Higher scores are better. Most home buyers will likely find their scores falling between 620 and 850.

Not just for qualifying

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

What can you do to improve your FICO score? Unfortunately, not much. Despite what you hear from "credit repair" companies, 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.)

Know your FICO

To raise your score, you must obtain the 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 to quickly get your FICO from all three reporting agencies, along with your credit report. They also provide information and online tools that can help you analyze what actions might have the greatest impact on your FICO score.

You can get a federally-mandated free credit report once per year from all three credit reporting agencies at AnnualCreditReport.com. These reports do not include a free score, but it's very inexpensive to get one at the same time.

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.