You Credit Score: How's Your FICO?

Since we live in an computer-driven world, it should come as no surprise that your ability to repay your mortgage boils down to just one number. The FICO score is compiled by credit reporting agencies. These agencies use the payment history of your various loans: credit cards, mortgages, car/boat loans and the like.

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 these methods vary from one agency to another, the differences aren't huge; each agency uses the following factors to calculate a credit score:

• Your Credit History - How long have you had credit?
• History of Payments - Have you paid more than 30 days late?
• Your Credit Card Balances - How many accounts? How much do you owe?
• Credit Inquiries - How many times have you had your credit checked for a loan?

Each of these is assigned a value and a weight. Each formula produces a single number which may vary slightly from one agency to another. FICO scores can be as low as 300 and as high as 850. Higher is better. Most folks getting a mortgage loan in the current environment have a score above 620.

Credit scores make a big difference in interest rates

FICO 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 FICO score

What can you do to improve your FICO score? Very little in the short term. Despite what you hear from "credit repair" companies, the score is calculated from your lifelong credit history, so it's not possible to raise it significantly in the short term. (Of course you can and should remove incorrect data on your credit report.)

Know your FICO score

Before you can improve your credit score, you must know your score and make sure that the reports from each credit reporting agency are correct. Fair Isaac, the corporation that offered the original FICO credit score, offers FICO scores on its website: myFICO.com. For a reasonable fee, you can quickly get your FICO from all three agencies, along with your credit report. They also provide information and tools that help you analyze what actions might have the greatest impact on your FICO score.

You can get a free credit report every year from all three credit reporting agencies by visiting AnnualCreditReport.com. These reports do not include a free credit score, but it's very inexpensive to get one at the same time.

Armed with this info, you'll be a more informed consumer and you'll be better positioned to get the most favorable mortgage.