| 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 800.
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.
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