Scoring Credit - How's your FICO?

When buyers apply for mortgages their ability to pay can be reduced to single numbers. All the years they have been making mortgage, car, and credit card payments this information is analyzed and narrowed down into single indicators of whether they are likely to meet their future obligations.

All three of the major credit reporting agencies (Equifax, Experian and TransUnion) use slightly different systems to arrive at scores. The best known is called the FICO score, based on a model developed by Fair Isaac and Company (hence the name) and used by Experian. Equifax's model is called BEACON, while TransUnion uses EMPIRICA. While each of the models considers a range of data available in your credit report, the primary factors are:

• Credit History - How long have you had credit?
• Payment History - Do you pay your bills on time?
• Credit Card Balances - How much do you owe on how many accounts?
• Credit Inquiries - How many times have you had your credit checked?

Each of these, and other items, are assigned a value and a weight. The results are totaled and distilled into a single number. FICO scores range from 300 to 800 – the higher being better. Typical home buyers likely find their scores falling between 600 and 800.

FICO scores are used for more than just determining whether or not buyers qualify for mortgages. Higher scores indicate buyers are a better credit risk, and thus may qualify for better mortgage rates.

There are things buyers can do about improving FICO scores. It is important for buyers to know their FICO scores and to ensure that their credit histories are correct. Conveniently, Fair Isaac created a web site www.myFICO.com that lets people do just that.

The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies – Equifax, Experian, and TransUnion – to provide you with a free copy of your credit report, at your request, once every 12 months. For more information about this government act visit http://www.ftc.gov/bcp/conline/pubs/credit/freereports.htm. 

Only one website is authorized to fill orders for the free annual credit report you are entitled to under law – www.AnnualCreditReport.com .

For a reasonable fee buyers can quickly get their FICO scores from all three reporting agencies, along with their credit reports. Also available is some helpful information and tools that help buyers analyze what actions might have had the greatest impact on their FICO scores. Each of the credit services offers similar services on their web sites: www.equifax.com, www.experian.com, and www.transunion.com.

Armed with this information, buyers are informed consumers and better positioned to obtain the most favorable mortgages available to them.