Scoring your Credit - How's your FICO?

Since we live in a computer-driven society, you're probably not surprised to hear that your ability to repay your mortgage boils down to one number. This score is built by credit reporting agencies. They use the payment history from your various loans: credit cards, mortgages, car loans and others.

The three reporting agencies use slightly different formulas to build a credit score. The original FICO 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, each agency uses the following to determine your score:

• Credit History - How long have you had credit?
• Late Payments - Do you have a history of late payments?
• Your Credit Card Balances - How many credit card accounts do you have, and how much do you owe on them?
• Requests for Credit - How many times have you had your credit checked for a loan?

These factors are assigned weights based on the formula being used. The results are added up and distilled into a single number. FICO scores can be as low as 300 and as high as 850. Higher is always better. Most home buyers these days have a score above 620.

Credit scores make a big difference in interest rates

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.

Raising your FICO score

What can you do about your FICO score? Very little in the short term. Because the credit score is based on a lifetime of credit history, it's very hard to change it quickly. (Of course you can and should have incorrect items removed from your credit report.)

Getting your credit score

In order to raise your credit score, you must obtain the credit reports that are used to build it. Of course, you need the score as well. Fair Isaac, the corporation that invented the first FICO credit score, offers FICO scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score as well as credit reports from all three credit reporting agencies. Also available are information and tools that can help you analyze what actions might have the greatest impact on your FICO score.

You can get a free credit report every 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 obtain the most favorable mortgage.