Your FICO Credit Score

Because our society is so computer-driven, it should come as no surprise that your ability to repay your mortgage comes down to a single number. Credit reporting agencies use your history of paying loans in order to build this score.

TransUnion, Equifax, and Experian, the three major credit reporting agencies, each have their own proprietary formula for building a credit score. The original FICO model 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 each of the models considers a range of data available in your credit report,   the differences aren't huge; each agency uses the following factors to calculate a credit score:

• Credit History - Have you had credit for many years, or for a short time?
• History of Payments - Do you have a history of late payments?
• Credit Card Balances - How many accounts do you hold, and how much do you owe?
• Requests for Credit - How many times have lenders pulled your credit for the purpose of lending you money?

Each of these factors is assigned a value and a weight. The results are added up and distilled into a single number. Credit scores range from 300 to 800. Higher scores are better. Most people who want to get a mortgage have a score above 620.

Your FICO score affects your monthly payment

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.

Improving your score

What can you do about your FICO score? Very little in the short term. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. (Of course, you can and should appeal incorrect items on your credit report.)

Getting your FICO score

Before you can improve your credit score, you must obtain your score and make sure that the credit reports from each agency are correct. Fair Isaac, the company that invented the original FICO  score, sells FICO scores on  myFICO.com. For a reasonable fee, you can quickly get your FICO score from all three reporting agencies, along with your credit report. They also provide helpful information and 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 a year from the three major credit reporting 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.