FICO Credit Scores: What Do They Mean?

Because we live in an automated, you're probably not surprised to hear that your creditworthiness boils down to a single number. The years of paying your various bills: your mortgage, car payments, and credit card bills are analyzed, diced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

All three major 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 build a credit score:

• Credit History - How long have you had credit?
• Late Payments - Have you paid more than 30 days late, and how often?
• Your Credit Card Balances - How many credit card accounts do you have, and how much do you owe?
• Credit Inquiries - How many times have you had your credit checked for a loan?

These factors are assigned weights based on the formula being used. The result is one number. Credit scores can be as low as 300 and as high as 850. Higher is always better. Most borrowers getting a mortgage these days score 620 or above.

Your score affects how much you pay in interest every month

Credit scores are used for more than just determining whether or not you qualify for a mortgage. Lenders give lower interest rates to individuals with higher scores.

Improving your score

What can you do to raise your FICO score? Very little in the short term. Since the score is entirely based on a lifetime of credit history, it's hard to significantly improve the score with quick fixes. You must appeal for the credit agency to remove any incorrect reporting from your credit report, which is the only "quick fix" for credit troubles.

Getting your credit score

Before you can improve your FICO score, you must know your score and make certain that the reports from each credit reporting agency are correct. Fair Isaac, the company that offered the first FICO credit score, sells scores on its website: myFICO.com. It's inexpensive, fast, and easy to get your credit score as well as reports from all three reporting agencies. Also available are information and tools that help you improve your FICO score.

You can get a free credit report once a 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 obtain the right mortgage for you.