Since we live in an automated society, it should come as no surprise that your ability to repay your mortgage comes down to a single number. The FICO score is created by credit reporting agencies. They use the payment history from all of your loans: credit cards, mortgages, car/boat loans and others.
TransUnion, Equifax, and Experian, the three major credit agencies, each have a proprietary formula for building your 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 each of the models considers a range of data available in your credit report, the differences aren't huge; all of the agencies use the following factors in building a credit score:
These factors are weighted slightly differently depending on which formula the agency uses. The result is a single number: your FICO score. Credit scores range from 300 to 800. Higher is better. Most borrowers who want to get a mortgage loan these days score 620 or above.
Did you know? FICO 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.
Unfortunately, there isn't a lot you can do to immediately improve your credit score. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. You must, of course, remove any incorrect reporting from your credit report; this is the only way to quickly improve your credit score.
Before you can improve your FICO score, you have to know your score and make certain that the reports from each agency are correct. Fair Isaac has created a website ( www.myFICO.com) that lets you do just that. It's inexpensive, fast, and easy to get your credit score as well as credit reports from all three credit reporting agencies. 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 free credit report once a year from all three credit reporting agencies when you visit AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting one is fast and inexpensive.
Armed with this info, you will be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.