Scoring your Credit - How's your FICO?
In today's increasingly automated
society, it should come as no surprise that when you apply for a mortgage, your ability to
pay can be reduced to a single number. All the years you've been paying your mortgage, car
payments, and credit card bills can be analyzed, sliced, diced, spindled and mutilated
into a single indicator of whether you're likely to meet your future obligations.
All three of the major credit reporting
agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a
score. 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 added up and distilled into a single
number. FICO scores range from 300 to 800, with 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 you qualify for a mortgage. Higher scores indicate you are a
better credit risk, and thus may qualify for a better mortgage rate.
What can you do about your FICO score?
Unfortunately, not much. Since the score is based on a lifetime of credit history, it is
difficult to make a significant change in the number with quick fixes. The most important
thing is to know your FICO score and to ensure that your credit history is correct.
Conveniently, Fair Isaac has created a web site www.myFICO.com) that let's you do just
that. For a reasonable fee, you can quickly get your FICO score from all three reporting
agencies, along with your credit report. Also available is some helpful information and
tools that help you analyze what actions might have the greatest impact on your FICO
score. 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, you will be a
more informed consumer and better positioned to obtain the most favorable mortgage
available to you. |
