Your Credit And FICO

Back in the 1960’s, a company called Fair Isaac devised a unique system to determine the credit worthiness of people who apply for loans.  Through a complicated mathematical computation (too complicated for this author!), they were able to study a person’s credit history and assign them a number that would represent how likely it was that they would be able to repay a loan they were applying for.

Fair Isaac sparked a revolution by pioneering credit risk scoring for the financial services industry. This new approach to lending enabled financial institutions to improve their business performance and expand consumers’ access to credit. Today Fair Isaac’s FICO score is widely recognized as the industry standard for lenders.

The FICO score condenses a borrower’s credit history into a single number based on past credit history. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed. The Federal Trade Commission has ruled this to be acceptable.  The real truth is that even if we did know, we probably couldn’t calculate it ourselves anyway.  Unless, of course, you happen to be a mathematical genius!

Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance. Developing these models involves studying how thousands, even millions, of people have used credit.

Score-model developers find predictive factors in the data that have proven to indicate future credit performance. Models can be developed from different sources of data. Credit-bureau models are developed from information in consumer credit-bureau reports.

Credit scores analyze a borrower's credit history considering numerous factors such as:

• Late payments

• The amount of time credit has been established

• The amount of credit used versus the amount of credit available

• Length of time at present residence

• Negative credit information such as bankruptcies, charge-offs, collections, etc.

There are really three FICO scores computed by data provided by each of the three bureaus––Experian, Trans Union and Equifax. Some lenders use one of these three scores, while other lenders may just use the middle score.

Fair Isaac has become so important in the financial industry that their word on your credit has become basically the final word.  Why would banks and creditors place so much credibility into one company?  The answer is simply because of their proven track record.

The FICO score has proven to be not only an accurate and amazingly consistent way of showing a person’s credit reliability, but it has also saved companies millions of dollars in credit write-offs due to bad lending decisions.  A study of loans that were granted and/or denied simply due to the FICO scores shows that Fair Isaac has been right over 80 percent of the time.

Of course, that required some chance taking on the part of many creditors, but they were willing to take the risk.  After all, this was a ground-breaking thing determining credit worthiness through a simple three-digit number.  Many companies jumped “on the bandwagon” just to show that Fair Isaac had the right idea.

Fast forward to the twenty-first century and you will find that FICO has become the definitive when it comes to financial and credit matters.  They have proven their reliability and their worthiness just through trial and error.

Unfortunately, the problem is that finding your FICO score isn’t as easy as you think.  The truth is that it’s not even shown on your credit report like you would think.  In fact, for years and years, your credit score was a securely kept secret number that was elusive to the average person.