What is FICO Score?

1254 reads · Last updated: December 5, 2024

A FICO score is a credit score created by the Fair Isaac Corporation (FICO). Lenders use borrowers’ FICO scores along with other details on borrowers’ credit reports to assess credit risk and determine whether to extend credit.FICO scores take into account data in five areas to determine a borrower's credit worthiness: payment history, the current level of indebtedness, types of credit used, length of credit history, and new credit accounts.

Definition

The FICO Score is a credit score created by the Fair Isaac Corporation (FICO). Lenders use a borrower's FICO Score along with other details in the borrower's credit report to assess credit risk and determine whether to extend credit. The FICO Score considers five areas of data to determine a borrower's creditworthiness: payment history, current level of indebtedness, types of credit used, length of credit history, and new credit accounts.

Origin

The FICO Score was first introduced by the Fair Isaac Corporation in 1989. The company was founded by engineer Bill Fair and mathematician Earl Isaac in 1956, aiming to evaluate credit risk through data analytics. The FICO Score quickly became the most widely used credit scoring standard in the United States.

Categories and Features

FICO Scores typically range from 300 to 850, with higher scores indicating lower credit risk. They are generally categorized into five levels: Excellent (800-850), Good (740-799), Fair (670-739), Poor (580-669), and Bad (300-579). Each category reflects different levels of credit risk for borrowers, affecting loan interest rates and credit limits.

Case Studies

During the 2008 financial crisis, many banks relied on FICO Scores to assess borrowers' credit risk. As many borrowers defaulted on loans, banks began to scrutinize FICO Scores more rigorously. Another example is Apple Inc., which used FICO Scores to evaluate applicants' credit risk when launching the Apple Card, determining whether to approve credit card applications.

Common Issues

Investors often misunderstand how FICO Scores are calculated, believing that simply not having debt will result in a high score. In reality, FICO Scores also consider the length of credit history and diversity of credit types. Additionally, frequently applying for new credit accounts can lower the score.

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