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FICO Scores

FICO Credit Score

A credit score is a number that reflects your creditworthiness at a given point in time, and can change as information on the credit report changes. Many people have heard about credit scoring but do not understand the basic facts about what it is and how it works.

The Fair Isaac Corporation (FICO) first developed models (or algorithms) for calculating credit scores in the 1950s. Credit scores started gaining widespread use in the late 1980s and gained even more attention in the 1990s when mortgage lenders began considering credit scores in their loan making decisions. Today credit scoring is used as a predictor of risk and decision making for loans, approving credit cards, opening bank accounts, mortgages, utility accounts, auto financing, insurance rates, and even employment background checks. Credit Scores are found on a Credit Report which supplies the information that the credit score is derived from. There are over 50 items of information on a credit report that are used in developing the credit score, and the information comes from many sources.

There are many different types of credit scoring models used today but the most used and accepted by the lending community is the FICO score. While each of the 3 major credit bureaus use the FICO model they each use a slightly different representation. There’s Equifax’s “Beacon Score”, Trans Union’s “Classic Score”, and the Experian’s “FICO Risk Model”. The scoring range is 300 – 850. Fair Isaac divides the scoring range into five risk categories:

                                    780 – 850 – Low Risk

                                    740 – 780 – Medium-Low Risk

                                    690 – 740 – Medium Risk

                                    620 – 690 – Medium High Risk

                                    620 – Below – High Risk

The consumer should also understand that there are many credit bureaus and reseller’s out there selling credit scores. Some of these providers do not sell scores using one of the FICO models. These scores are termed FAKO scores because they use a scale different from FICO and may be deceiving. For example if your bank is using the FICO model to determine if you will be approved for a loan and you buy a credit scores whose model uses a scale that goes from 501 to 990 it will be very difficult to compare the two scores. It is recommended that when you purchase your credit score make sure the seller is providing a FICO score to avoid confusion.

It is also important to know that there are different scoring models at credit bureaus designed for particular industries that use them. For example the credit bureaus will sell the auto industry a score calculated specifically for them, while selling a slightly different version designed for the insurance industry. This is done because risk factors for these industries are not exactly the same. Even credit scores that are sold directly to consumers may vary slightly from the score that is sold to specific industries. All this can make credit scoring complex to understand to the average person.

Consumers must also appreciate that while we do have the right to free credit reports (at least one per year from each credit bureau) the same is not true or credit scores. The score’s must be made available to the consumer but the bureaus do have the right to sell the scores at reasonable rates. If a consumer chooses to buy their score directly from the credit bureau it will not negatively affect the consumer’s credit score (soft inquiry). When a bank or auto dealer buys your score with your permission to make a lending decision this inquiry will be inserted on your credit report and affect your score (hard inquiry).