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?
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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.
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.
