FICO Credit Scores: What Do They Mean?

Since our society is so automated, it's probably not that surprising that your ability to repay virtually any loan boils down to a single number. The FICO score is built by credit reporting agencies. These agencies use the payment history from your various loans: mortgages, car/motorcycle/boat loans, credit cards, and others.

Each of the three credit agencies has its own formula for building your credit score. The original FICO was developed by Fair Isaac and Company. While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While the formulas vary from one agency to another, each agency uses the following to determine a score:

• Credit History - How long have you had credit?
• History of Payments - Do you have a history of late payments?
• Balances on your Credit Cards - How many accounts do you hold, and how much do you owe?
• Requests for Credit - How many times have lenders pulled your credit report for the purpose of lending you money?

These factors are assigned weights based on the formula being used. Each formula produces a single number which may vary slightly by agency. FICO scores can be as low as 300 and as high as 800. Higher is always better. Most borrowers getting a mortgage loan these days score 620 or above.

Not just for qualifying

FICO scores affect more than your ability to get a loan. They also affect your interest rate. Higher scores indicate you are a better credit risk, and thus may qualify for a better mortgage rate.

Raising your credit score

What can you do to improve your FICO score? Very little in the short term. So called "credit repair" companies advertise quick fixes, but the score is based on your lifetime credit history, so it's not possible to raise it significantly in the short term. You must remove any incorrect data from your credit report; this is the only way to quickly improve your credit score.

Know your FICO score

In order to raise your FICO score, you must obtain the credit reports that the agencies use to build it, and of course, you need the score itself. Fair Isaac, the corporation that offered the original FICO credit score, sells FICO scores on myFICO.com. It's inexpensive to quickly get your FICO from all three agencies, along with your credit report. They also provide information and online tools that help you analyze what actions might have the greatest impact on your FICO score.

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

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