Since we live in an computer-driven world, it should come as no surprise that your ability to repay your mortgage loan comes down to a single number. This score is compiled by credit agencies. These agencies use the payment history of all of your loans: credit cards, mortgages, car loans et cetera.
All three credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a score. Fair Isaac and Cooriginally developed this score. . 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, all of the agencies use the following to determine your credit score:
- Credit History – How long have you had credit?
- Payment History – Do you have a history of late payments?
- Balances on your Credit Cards – How many accounts? How much do you owe on your accounts?
- Requests for Credit – How many times have you had your credit checked for a loan?
These factors are weighted a little bit differently depending on the formula being used. Each formula produces a single number which may vary a a little by agency. Credit scores range from 300 to 800. Higher is always better. Typical home buyers probably find their credit scores between 620 and 800.
Not just for qualifying
Did you know? FICO scores affect more than your ability to get a loan. They also affect your interest rate. Higher scores indicate you are probably 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? Unfortunately, not much. Some companies promise quick fixes, but they can’t do anything different than what you can do — for free. (Of course you must remove incorrect data on your credit report.)
Getting your credit score
In order to raise your credit score, you’ve got to obtain the credit reports that the agencies use to build it. Of course, you need the score as well. Fair Isaac, the company that invented the first FICO score, offers credit scores on myFICO.com. It’s inexpensive, fast, and easy to get your credit score as well as reports from all three agencies. They also provide information and online tools that can help you understand how to improve your credit score.
You can get a federally-mandated free credit report every year from the three major agencies when you visit AnnualCreditReport.com. You won’t get a free credit score from AnnualCreditReport.com, but getting one is fast and inexpensive.
Now that you have all the facts, you will be a more informed consumer and you’ll be better positioned to get the right mortgage for you.