What is a FICO Credit Score?

Credit scores are a better picture of whether the loan will be repaid, based entirely on how the consumer has handled loans in the past. .

The Origins of the FICO Credit Score

A FICO score is today's most commonly used credit score by lenders and other financial institutions. FICO is a score that was developed by Fair Isaac Company, which specializes in the construction of statistical scoring models.

Fair Isaac developed this scoring model using millions of actual consumer credit data files to develop a complex and secret mathematical algorithm. And since FICO is developer and owner of the model, its primary elements of the FICO credit score system is kept secret.

When evaluating potential lender's loan application, there was a good deal of subjectivity involved in the entire credit rating and history development process. As a result, lenders wanted a more objective, standardized system through which they could provide more useful evaluations of a consumer’s credit history.

Credit scoring is a method of determining the likelihood that credit users will pay their bills on time. Fair, Isaac started developing credit scoring models in the late 1950s and, since then, credit scoring has been used by lenders. It was adopted widely by mortage lenders in late 1990s after Fnannie Mae and Freddie Mac endorsed it.

FICO scores range from 300-850, with a higher score is viewed as a better risk than someone with a lower score. Most people score in the 600s and 700s.

Three credit bureaus (Equifax, Experian and TransUnion) use FICO software to calculate credit scores and sell them to lenders. Lenders buy your FICO score from three national credit reporting agencies. Each credit agency's credit score may be different because they collect their information from different creditors and update their records at different times.

How the FICO Score Works

In basic terms, the functioning of the FICO credit score system is fairly easy to understand. Under the FICO credit score system takes into consideration a consumer’s payment history, current unpaid debt, how long you have had credit, number of credit inquiries, and types of credit you’ve had in the past. By evaluating this information, by considering these factors, a numerical score is determined. A credit reporting agency will assign a FICO credit score to a consumer somewhere in the range of 300 to 850.

The FICO score is based only on information in a consumer's credit report. It does not take into account your income, assets or length of time on the job. Lenders generally evaluate these factors in addition to the FICO score.