Understanding the FICO Credit Reporting System

FICO is the acronym for the Fair Isaac Corporation.  This organization is the number one provider of credit scores, as well as fraud detection, decision management, and credit risk score services.  All the services provided by FICO were designed for a single purpose – to help financial services company make educated decisions when it comes to lending money or offering credit.  The goal is to help companies use intelligent information gathered and formulated so the number of people that default on loans or revolving credit payments diminishes.

FICO, which was the first credit scoring system developed in the United State developed by an engineer named Bill Fair and a mathematician named Earl Isaac.  Pulling the two names, the acronym for Fair Isaac was formed, which is now known worldwide simply as FICO.  Both Fair and Isaac invested $400 to get the company launched, which was based on a unique principal comprised of intelligently used data so businesses of all types and sizes could make more informed decisions pertaining to credit lent to consumers.

The first customer of the FICO system was Conrad Hilton, the founder of Hilton Hotels and Paris Hilton’s grandfather.  At that time, Hilton hired FICO to design, program, and install a fully comprehensive billing system for Carte Blanch, one of the first credit cards to be developed.  Shortly after, American Investments signed up to use this credit scoring system.  Believing in what they had to offer, FICO mailed letters to 50 of the country’s largest creditors explaining the scoring system and associated benefits.  Interestingly, while millions of companies today use FICO, at that time just one company responded.

After the Connecticut Bank and Trust signed up to use FICO in the early 1970s, European countries introduced commercial development of scoring models.  During this same period, coded information started to be input into computer terminals by FICO operators.  Then, in 1975, Wells Fargo was provided with a FICO system capable of predicting credit risk of consumers by using a special mathematical formula and specific data.  By 1981, FICO introduced the first credit bureau risk score and in 1986, the first automated credit account management system.

Just a year later, First Data Resources, a credit card processor started using adaptive control technology developed by FICO and the Paul Revere Life Insurance company began using the first decision-making system designed for strategic underwriting.  With this system, the life insurance company was able to underwrite disability income policies more efficiently.  As you can see, shortly after FICO was developed and introduced to the public, amazing things began to happen.  However, when FICO was debuted in 1989 at Equifax, one of the three leading credit bureaus used in the United States, it showed just how effective this credit scoring system was.

From the early years to today, FICO has enjoyed a number of vital accomplishments.  As an example, FICO created a partnership with Memento in the fight against internal fraud and a new partnership with Equifax was completed whereby new analytic solutions could be delivered quicker and in a more efficient manner.   However, one of the most recent developments was the release of an additional version called FICO Debt Management 7 and FICO Falcon Fraud Manager 6.  Both of these products are the first to be built on the new Decision Management architecture of FICO.

The way FICO works is that whenever you apply for a mortgage loan, car loan, boat loan, motorcycle loan, credit card, personal loan, business loan, etc, your credit report would be pulled from the three primary reporting agencies of TransUnion, Equifax, and Experian.  The score the creditor would receive would be based on the FICO formula, which starts with the number 300 and goes up to 850.  The lower the FICO score the less creditworthy whereas the higher the score the more creditworthy.  Based on the number of your credit score, lenders would either approve or deny the loan or credit.

With the FICO score being so precise, it allows creditors to make intelligent decisions, which ultimately provides them with a level of protection against borrowers who are at the greatest risk of default.  The data used to calculate the FICO score includes things such as late payments, amount of credit, years employed, income, etc.  It is important to understand that in addition to the FICO score being used by creditors, today it is also used by insurance companies to determine if a policy would be written or not, and by potential employers to help them decide if they want to hire a certain applicant or not.  Therefore, doing whatever it takes to increase the FICO score would be to your benefit.

Understanding the FICO Credit Reporting System

Most American consumers are fully aware the importance of having a high FICO score, which is the credit scoring system that has been used since 1956 to help creditors make educated decisions about offering money or credit.  While having a low credit score would create all types of challenges, it is important for consumers to understand that a number of options for repairing damaged credit exist.  While processes to accomplish this take time and effort, it would be an investment worth making.

The FICO score is calculated using a specific formula and specific data.  For instance, things such as late payments, spending over a set credit limit, filing for bankruptcy, having a tax lien filed, or going through a judgment are some of the criteria used for the credit score to be determined.  FICO has partnerships with the three main credit bureaus in the United States to include Equifax, Experian, and TransUnion.  However, because each creditor can choose to report to one or all three of these agencies, whenever a person wants to check the most current FICO score a report from all three bureaus would need to be analyzed.

The FICO credit score system takes the above mentioned data and ultimately creates a three digit number, which starts at 300 and goes to 850.  The lowest score a person could have is 300, which is extremely poor.  For a rating such as this, it means the individual was not financially responsible.  Keep in mind that problem with finances and credit could be pure mismanagement and irresponsibility but it could be circumstance.  As an example, a person whose spouse died, became seriously ill, lost a job, or went through a tough divorce might have a period of not being able to meet financial responsibilities, which in turn causes the credit score to decline.

With a FICO score from 300 to 500, securing a loan or being approved for a credit card would be impossible although an individual interested in rebuilding credit could get a secured credit card.  For this, the individual would deposit money into a special account, which becomes the available credit line.  In other words, if the card issuer allowed a maximum of $300, the individual could deposit up to $300 in the account.  Then, if a purchase of $100 were made, that amount would be deducted from the deposited amount, making the available credit to $200.

Most often, people can make additional deposits as the balance declines.  The benefit is that management of secured credit cards are also reported to one or all three credit bureaus so as long as the card is managed properly, it would slowly begin to increase the FICO score.  In addition, many card issuers will eventually offer the person an unsecured credit card once they are confident the person is capable of being financially responsible.

For the person with a FICO credit score of 501 to 650, securing loans and credit is possible.  However, sometimes finding a reputable and honest lender can be challenging and even when found, it is common for the interest rate to be outrageously high.  On the other hand, once a person’s FICO score reaches 651 and up, securing a loan and being approved for credit is relatively easy.

Typically, interest rates would still be somewhat high until the score is around 750, at which time prime rates are typically offered.  Of course, a person with a FICO score of 800 to 850 is offered the best rates and terms available and is rated as a creditworthy consumer, which means lots of buying power.  It is imperative that people order a copy of their credit report from Equifax, Experian, and TransUnion once a year.  The reason – it is common for individuals to find erroneous information, exempt data, and other problems that if not caught quickly and corrected could cause an excellent score to plummet.

In addition to FICO providing a powerful credit scoring system used by most loan and companies today, as well as insurance companies and potential employers, this company provides businesses with a number of other products and services.  For instance, FICO has a Decision Management application designed to automatically improve and connect decisions based on analytic models, proprietary, and user-defined strategies.  FICO also provides analytics such as analytics for portfolio purposes and optimization and predictive models.  All of the products and services offered by FICO are intended to help businesses around the country make informed financial decisions.


Reba Jordan November 27, 2011 at 6:00 pm

How do student loans effect our credit score? I have financial aid for school each year and will soon be graduating from my masters program.
Reba Jordan

FAZ November 28, 2011 at 9:49 pm

Reba, loans are loans, you will be expected to pay your loan in the manner to which your agreement was made

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