Part 2: FICO and You
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.
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.
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