What is Beacon Score?

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A Beacon score is one of many credit scoring models developed by FICO, the major company in that field. It is still in use today but is currently branded simply as a FICO score. In years past it was often referred to as an Equifax Beacon score, after the credit bureau Equifax. For example, a Beacon 5.0 score is now known as a FICO Score 5, according to FICO. That score remains in wide use in the mortgage industry.

Definition

A credit score is a numerical indicator used to assess an individual's credit risk. It is typically calculated by credit reporting agencies based on factors such as credit history, repayment records, and credit utilization. Credit scores usually range from 300 to 850, with higher scores indicating lower credit risk.

Origin

The concept of credit scoring was developed by FICO, a major player in the credit scoring field. Initially, credit scores were known as Equifax Beacon scores, named after the credit bureau Equifax. Over time, the FICO score became the more widely used term, especially in the mortgage industry.

Categories and Features

Credit scores are primarily divided into several types, including FICO scores and VantageScore. FICO scores are the most commonly used, widely applied in loan approvals and credit card applications. VantageScore, on the other hand, is another scoring model developed jointly by the three major credit bureaus. The advantage of FICO scores lies in their broad recognition and usage, while VantageScore offers more flexible scoring criteria.

Case Studies

During the 2008 financial crisis, many banks relied on FICO scores to assess borrowers' credit risk, helping them decide whether to approve loans. Another example is a large retailer using FICO scores to determine credit limits and interest rates when offering credit cards to customers.

Common Issues

Investors might encounter issues such as choosing the right scoring model, the accuracy of scores, and how to improve personal credit scores. A common misconception is that credit scores are fixed, whereas they actually change with credit behavior.

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