Scoring your Credit

 In today's automated society, when you apply for a mortgage, your ability to pay is reduced to a single number – your FICO. FICO scores place a value on the types of accounts you hold, as well as your credit history. The formula that determines your FICO scores, however, is not disclosed to the consumer.

The FICO scoring scale runs from 300 to 850. The vast majority of people will have scores between 600 and 800. A score of 720 or higher will get you the most favorable interest rates on a mortgage, according to data from Fair Isaac Corp., a California-based company that developed the credit score. (Its own score is called the FICO score.)

All three of the major credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a score. FICO is based on a model developed by Fair Isaac and Company (hence the name) and is used by Experian. Equifax's model is called BEACON, while TransUnion uses EMPIRICA. While each agency considers variety of factors, the 5 most important factors to determining your FICO credit score are:

1. Your payment history
2. The amount of outstanding debt you have compared to your credit limit
3. Your credit history
4. The types of credit you use
5. Credit Report Inquires

 Each of these, and other items, carry a value and a weight. The results tallied into a single number, with the higher being better.

In addition to determining whether or not you qualify for a mortgage, the higher your FICO score, the better credit risk you are, thus perhaps qualifying you for a better mortgage rate.

FICO Credit scores are not perfect
The major drawback to FICO credit scoring is that it relies on information in your credit report, which is quite likely to contain errors. That's why it's critical that you check your credit reports annually, or at the very least three to six months before planning to buy a house or a car. That will give you sufficient time to correct any errors before a lender pulls your FICO score.

To help you check your credit, Fair Isaac has created a web site www.myFICO.com that lets you do just that. For a reasonable fee, you can easily get your FICO score from all three reporting agencies, along with your credit report. You will also find some helpful information that can help you analyze what credit actions might cause 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.

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