Your FICO score

How's Your FICO Score?

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 850, with higher being better. Typical home buyers likely find their scores falling between 600 and 850. Would-be home buyers with scores under 600 will find that lenders will often require larger down payments and higher interest rates, or they might simply be turned down for any mortgage at all.

FICO scores are used for more than just determining whether or not you qualify for a mortgage. Landlords use them to determine how rent worthy you are. Insurance companies use them to determine your insurance rates or whether they should insure you at all. Prospective employers use them to decide whether to hire you. Some banks require a credit check before you can open a checking account.

While it is questionable whether your credit history relates in any way to how much of an insurance risk you will be or whether you will make a good employee, it is currently legal for insurers, employers and bankers to use credit history as part of their decision making process. Because so much of your financial well being rides on your credit score, it makes sense to try to maintain as high a score as possible.

What can you do about your FICO score? You can improve your score, but improvement takes time. Since your score is based on a lifetime of credit history, it is difficult to make a significant change with quick fixes. Beware of credit scammers who promise just that.

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 at www.myFICO.com which 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.

Federal law also permits you to access your credit report annually for free from each of the three main credit bureaus. To take advantage of this federal perk, go to www.annualcreditreport.com; however, this site does not provide you with your credit score.