The "FICO" Score - What Is It?

Lenders routinely make efforts to determine the relative risk worthiness of potential customers. They do this on the basis of their credit history, which influences the probability of them making timely payment on loans. A standard for determining the credit score has been formulated to facilitate this process. FICO is rated as the best credit score model in the United States. Used in the consumer banking industry primarily, it is calculated by applying the mathematical formulae developed by Fair Isaac Corporation. Based on the FICO score and after verifying assets, banks and institutions deny or approve credit and determine the interest rates to be applied in each individual case.
The Score
The major categories of information that are evaluated in the calculation of credit scores are as follows-
• Payment History

The automated credit reporting industry comprising credit report agencies factor in the types of credit cards owned such as MasterCard Visa, Discover, and American Express as part of the assessment. Departmental store cards and installment or mortgage loans from finance companies are also taken into consideration. Bankruptcies are malignant threats to the score as they stay on for nearly 7-10 years. The payment history also shows details of any instances of missed payments.

• Amounts Owed

Possessing credit accounts as well as owing money does not necessarily put a customer at high risk. What is important is the total due at the time of preparation of the report. A balance is shown on cards even though a customer might be making timely payments. The loan amount owed is compared with the original loan amount by the automated credit reporting industry for calculating your credit score.

• Credit History length

A long credit history could increase the score, and people who have not being using their available credit can also get a high score. The duration of the oldest and most recent account owned is considered by the automated credit reporting industry for calculating credit score. Opening many accounts is not recommended as new accounts could lower the average duration of credit history, thus affecting the score.

• New Credit

The amount of credit available increases over the years. However, opening of multiple accounts could pose a risk for people who do not have long established credit history.

• Types of Credit in use

Approximately 10% of the score is based on this category. It considers all credit, whether to finance companies or retail accounts.

Benefits of FICO score

• Personal information such as gender, race, marital status and nationality is not considered for credit scoring as lenders focus only on the financial history.
• Borrowers scoring above lenders ‘score cutoff’ can get their mortgage applications approved within a matter of days instead of weeks.
• If there is a poor performance in the credit history, it doesn’t affect the current credit scoring. As the current credit situation improves because of payments, it is reflected on the credit score.
• Easy availability of scientifically calculated credit scores enables lenders to sanction more credit depending on the score without having to make a vague call about a borrower’s ability to repay. Potential good customers can be identified through their credit reports, irrespective of their poor credit history.
• When a customer applies for credit, the credit scores determine if the customer is eligible for a credit and can assure timely payment of dues.
• Lenders can reduce your interest rates or increase credit amount based on your earlier credit history. Using the score they can also lower overall rates by controlling credit losses.

All factors included in the report are equally important. The nature of the new loan applications is determined by the positive or negative history reflected by the score. Inquiries are conducted to ascertain authenticity of the information. These inquiries have a very small impact on the score, as nearly 5 points are taken off the credit report for every inquiry conducted. To increase FICO scores, it is important for you to pay bills on time and apply for credit frequently.