Fico Score

FICO is an abbreviation for Fair Isaac Corporation and refers to a person's credit score based on credit history. Lenders and credit card companies use the number to decide if the person is likely to pay his or her bills. A credit score is evaluated using information from the three major credit bureaus and is usually between 300 and 850.

A credit score in the United States is a number representing the creditworthiness of a person, the likelihood that person will pay his or her debts. Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers. Widespread use of credit scores has made credit more widely available and cheaper for consumers. The best-known and most widely used credit score model in the United States, the FICO score is calculated statistically, with information from a consumer's credit files. It provides a snapshot of risk that banks and other institutions use to help make lending decisions. Applicants with higher FICO scores may be offered better interest rates on mortgages or automobile loans. The NextGen Score is a scoring model designed by the FICO company for assessing consumer credit risk. It has not enjoyed the same level of adoption as the traditional FICO score. In 2006, to try to win business from FICO, the three major credit-reporting agencies introduced VantageScore. According to court documents filed in the FICO v VantageScore Federal lawsuit the VantageScore market share is less than 6%. Other credit consumer scores are published by third party agencies such as "Community Empower" and "Quizzle" as the CE Score. The scores reported by such agencies are NOT actual FICO scores, but approximations based on proprietary algorithms. . These scores are not sold to lenders and are never used to make lending decisions. They are sold only to consumers as an "educational" score. Credit scores are designed to measure the risk of default by taking into account various factors in a person's financial history. Although the exact formulas for calculating credit scores are secret, FICO has disclosed the following components:There are other special factors which can weigh on the FICO score. A FICO score is between 300 and 850, exhibiting a left-skewed distribution with 60% of scores near the right between 650 and 799. According to FICO the median score is 723. Each individual actually has three credit scores for the FICO scoring model because the three national credit bureaus, Experian, Equifax and TransUnion, each has its own database. Data about an individual consumer can vary from bureau to bureau. These studies point out that people with higher scores have fewer claims. Studies also indicate that the majority of insureds pay less in insurance through the use of scores. Credit scores are widely used because they are inexpensive and largely reliable, but do have their failings. Because a significant portion of your FICO score is determined by the ratio of credit used to credit available on credit card accounts, a simple way to increase the score is to simply increase the credit limits on your credit card accounts. Some have blamed lenders for inappropriately approving loans for subprime applicants, despite signs that people with poor scores were at high risk for not repaying the loan. By not considering whether the person could afford the payments if they were to increase in the future, many of these lenders may have put the borrowers at risk for default. According to a Fitch study, the accuracy of FICO in predicting delinquency has reduced in recent years. In 2001 there was an average 31-point difference in the FICO score between borrowers who had defaulted and those who paid on time. By 2006 the difference was only 10 points. Some banks have reduced their reliance on FICO scoring. For example, Golden West Financial (which merged with Wachovia Bank in 2006) abandoned FICO scores for a more costly analysis of a potential borrower's assets and employment before giving a loan.