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 creditworthiness comes down to a single number. Credit reporting agencies use your history of paying all types of loans to build your FICO score.

All three major credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a credit score. The original FICO model was developed by Fair Isaac and Company. While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "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 your credit score:

• Credit History - Have you had credit for years, or for a short time?
• Late Payments - Do you have any payments later than 30 days?
• Your Credit Card Balances - How many accounts do you have, and how much do you owe on them?
• Credit Inquiries - How many times have lenders pulled your credit for the purpose of lending you money?

These factors are weighted a little bit differently depending on which formula the agency uses. Each formula produces a single number which varies slightly by agency. FICO scores range from 300 to 850. Higher scores are better. Most folks getting a mortgage have a score above 620.

Not just for qualifying

Did you know? FICO scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are probably a better credit risk, and thus may qualify for a better mortgage rate.

Can I improve my FICO score?

Unfortunately, there isn't a lot you can do to immediately improve your credit score. Despite what you hear from "credit repair" companies, the FICO score is based on your lifelong credit history, so you can't turn it around right away. (Of course you can and should remove incorrect data on your credit report.)

Know your FICO

To raise your score, you must get the reports that are used to build it, and of course, you need the score itself. Fair Isaac has created a web site (www.myFICO.com) that lets you do just that. For a reasonable fee, you can quickly get your FICO score from all three agencies, along with your credit report. Also available are information and online tools that can help you improve your FICO score.

You can get a federally-mandated free credit report every year from the three major agencies at AnnualCreditReport.com. You won't get a free credit score from AnnualCreditReport.com, but getting it is fast and very inexpensive.

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