How FICO Credit Scores Are Calculated

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Since we live in an automated world, it's not surprising that your ability to repay your mortgage loan boils down to just one number. The years of paying your various bills: your mortgage, car payments, and credit card bills can be analyzed, sliced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

All three credit agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a score. The original FICO was developed by Fair Isaac and Company. While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While these methods vary from one agency to another, the differences aren't huge; each agency uses the following factors to build your score:

• Credit History - How long have you had credit?
• Payment History - Have you paid more than 30 days late?
• Balances on your Credit Cards - How many accounts do you have? How much do you owe on your accounts?
• Inquiries on Your Credit - How many times have lenders pulled your credit report for the purpose of giving you a loan?

Each of these factors is assigned a value and a weight. The result is a single number: your FICO score. Credit scores can be as low as 300 and as high as 850. Higher is better. Most home buyers likely find their FICO scores between 620 and 850.

Your FICO score greatly affects how much you pay in interest every month

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.

Raising your credit score

Is it possible to raise your FICO score? So called "credit repair" companies advertise quick fixes, but the FICO score is based on your lifelong credit history, so it's not possible to raise it significantly in the short term. You should appeal for the credit agency to remove any incorrect data from your credit report, which is the only way to quickly improve your credit score.

How do I find out my credit score?

Before you can improve your FICO score, you must obtain your score and be sure that the reports from each credit reporting agency are correct. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. For a reasonable fee, you can get your FICO score from all three reporting agencies, along with your credit report. Also available are helpful information and online tools that can help you analyze what actions might have the greatest impact on your FICO score.

You can get a free credit report once a year from all three credit reporting 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 information, you will be a more informed consumer and you'll be better positioned to obtain the right mortgage for you.