FICO Credit Scores: What Do They Mean and Who Said So?

Since our society is so automated, it's probably not surprising that your ability to repay your mortgage loan comes down to one number.

The FICO score is created by credit reporting agencies. All three major credit agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a score. Fair Isaac and Co originally developed this score.These factors are assigned weights based on formulas. The results are added up and distilled into a single number. Credit scores range from 300 to 850. Higher scores are better. Most borrowers who want to get a mortgage in the current environment have a score above 620.

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 factors in building a score:

Payment History 35% - How do you pay your bills? On time or Late?

Amounts Owed 30% - Managing Debt - Are you always Maxed out on your Credit cards?

Length of History 15% - Are you a Newbie to managing debt?

Mix of Credit 10% - Are you maintaining various types of debts like auto loans and credit cards?

Inquiries 10% - Have you been jumping around from lender to lender and letting them all run your credit report?

Not just for qualifying

Did you know? Credit scores are used for more than just determining whether or not you qualify for a mortgage. Lenders give lower interest rates to individuals with higher scores. Insurance companies, auto lenders and credit card companies also use FICO scores.

What about Credit Repair Companies?

So called "credit repair" companies advertise quick fixes, but the FICO score is formulated from your lifelong credit history. You should, of course, remove any incorrect data from your credit report, which is the only way to quickly improve your credit score. Remember, if you were truly late on a payment or didn't pay a medical bill, then the creditor will not remove the bad mark on your report. Outright errors can be removed as long as you have documentation to prove it.

Know your FICO score

To raise your credit score, you've got to get the reports that the agencies use to build it, and of course, you need the score itself. Fair Isaac, the corporation that offered the first FICO score, offers FICO scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score as well as reports from all three agencies. They also provide helpful information and online tools that can help you understand how to improve your credit score.

You can get a federally-mandated free credit report once per year from the three major credit reporting agencies when you visit AnnualCreditReport.com. These reports do not include a free credit 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 get the most favorable mortgage. Curious about your FICO score? Give me a call at 630-660-8868