You Credit Score- How's Your FICO?
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Since our society is so computer-driven, it's probably not that surprising that your ability to repay virtually any loan boils down to one number. The years of paying your various bills: your mortgage, vehicle payments, and credit card bills are analyzed, sliced, diced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.
All three credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a credit score. The original FICO score was developed by Fair Isaac and Company. 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 these methods vary from one agency to another, each agency uses the following to build your credit score:
- Credit History - How many years have you had credit?
- Payment History - Do you pay your bills on time?
- Credit Card Balances - How many accounts do you have, and 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 differently depending on which formula the agency uses. The result is a single number: your credit score. Credit scores can be as low as 300 and as high as 800. Higher is better. Most home buyers likely find their scores falling between 620 and 800.
Credit scores make a big difference in interest rates
Did you know? 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.
Can I raise my credit score?
Is it possible to improve your FICO score? Some companies promise quick fixes, but they can't do anything different than what you can do — for free. (Of course you must remove incorrect data on your credit report.)
Know your FICO
Before you can improve your credit score, you have to get your score and ensure that the reports from each agency are correct. Fair Isaac, the corporation that invented the original FICO score, offers FICO scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score along with reports from all three credit reporting agencies. They also provide information and tools that help you analyze what actions might have the greatest impact on your FICO score.
You can get a federally-mandated free credit report every year from all three credit reporting agencies by visiting AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it is quick and very inexpensive.
Armed with this info, you will be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.