How FICO Credit Scores Are Calculated

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Since we live in a computer-driven society, you're probably not surprised to hear that your ability to repay virtually any loan 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.

The three reporting agencies use slightly different formulas to build a credit score. Fair Isaac and Cooriginally developed this score. . 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 the formulas vary from one agency to another, the differences aren't huge; all of the agencies use the following factors to build a credit score:

  • Credit History - How long have you had credit?
  • History of Payments - Do you have any payments later than 30 days?
  • Credit Card Balances - How many credit card accounts do you have, and how much do you owe on them?
  • Inquiries on Your Credit - How many times have lenders pulled your credit report for the purpose of giving you a loan?

These factors are weighted a little bit differently depending on which formula the agency uses. The results are added up and distilled into a single number. Credit scores can be as low as 300 and as high as 800. Higher is better. Most home buyers likely find their scores between 620 and 800.

FICO makes a difference in interest rates

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 to improve your FICO score? Very little in the short term. Because the score is based on your lifelong credit history, it's difficult to change it quickly. (Of course you must appeal incorrect items on your credit report.)

Know your FICO score

To improve your credit score, you've got to get the reports that are used to build it. Of course, you need the score as well. Fair Isaac, the company that invented the original FICO score, offers 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 help you improve your credit score.

You can get a free credit report once per year from all three agencies by visiting 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.

Armed with this info, you'll be a more informed consumer and you'll be better positioned to obtain the right mortgage for you.

*Note: American Pacific Mortgage Corporation is not a credit repair company; this information is for information purposes only. We are not licensed credit repair specialists or counselors.”

Curious about your credit score? Give us a call: (209) 357-7000.

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