The FICO score

FICO is an acronym for Fair Isaac Corporation (traded publicly under the symbol FIC) and usually refers to the best known credit score system in the United States which is 
calculated using different mathematical formulae developed by this company. This score is one of the most important factors in obtaining credit in the United States of America and demarcates you into categories fit to receive good or bad credit treatment. In institutions which use scores as the primary factor in their lending decisions, scores below certain numbers which is usually set by each lender's risk management department, may result in denial of credit or the credit being offered at a higher interest rate.

The three major credit reporting agencies in the United States of America, namely Equifax, Experian and Trans Union, calculate their own FICO scores, which go by different trademark names as well as many different versions of the score, and these often differ because of what they are meant to predict and when they were written originally. For instance, Beacon, Beacon 96 and the Pinnacle are available only from Equifax; Empirica Auto 95 Precision Score and Precision 03 available only at Trans Union, and Fair Isaac Risk Score available only at Experian. These versions which were all developed for the respective agencies by Fair Isaac, differ from one another and are updated periodically to include changes and reflect the consumer's current repayment behavior. The NextGen scores are the most recent addition to the list of scores, but creditors vary in terms of their choice version that they prefer to use.

These scores often use a multiple scorecard design. Each version uses 10 or more individual scorecards, and each of these individual scorecards are generally compared with similar others. For instance, a borrower with two one month old late payments will be scored against a population with a few minor delinquencies. The individual in question is then graded according to the variables that seem to indicate a repayment risk in that group. This feature can cause a borrower with delinquencies to score in the same range as a borrower without any delinquencies.

It is worth mentioning that each of these credit reporting agencies have also developed their own separate proprietary versions of a credit score that is intended to compete with Fair Isaac's score. Although not as popularly used, these scores like Trans Union's TransRisk score or Experian's ScoreX score are less expensive than the FICO score and, in certain situations, may predict the risk level of a prospective borrower more accurately. The cost savings of a non-FICO score are found to be tempting to some banks and credit card companies, who desperately need an accurate risk assessment on millions of accounts every year. Only time will tell whether these alternative scores will ever manage to displace Fair Isaac from its dominant position in the U.S. market when it comes to credit scores.

Almost all large banks also have a practice of building and using their own proprietary statistical models for credit scoring purposes, often in conjunction with the FICO score or other outside scores. The statistical models that generate credit scores are most often subject to regulations as laid down by the federal government. The Federal Reserve Board's Regulation B, which implements the Equal Credit Opportunity Act, explicitly prohibits a credit scoring model from considering any prohibited basis such as race, religion, national origin, color, sex, or marital status for the calculation of the same. Regulation B also dictates that credit scoring models need to be empirically derived and statistically sound. Moreover, if any adverse action needs to be taken as a result of the credit score, for example if an individual's application for credit is denied, then specific reasons for the denial must mandatorily be provided to the individual.

A simple statement that the individual failed to score high enough is insufficient; the reasons must necessarily be specific and detailed.

There are several generally accepted algorithms that exist for extracting the primary contributing factors to a low credit score. One or more of these algorithms are normally used to supply a list of reasons in the event that a loan applicant has been denied credit, in order to satisfy the Regulation B requirement that specific reasons are disclosed. Some consumers feel these adverse action reasons are somewhat insincere, as the only determining factor for credit denials is a numeric score and the reasons are summed up only for the consumer.

As we have already seen, each credit bureau also has one or more of its own generic credit scores, available both to consumers on their websites as well as lenders. For ease of use, these scores are usually mathematically scaled so that they fall in the same general range as the FICO score. These scores are used by some businesses to assess credit-worthiness in the absence of which they would not be offered; however the FICO score continues to be the dominant score in use today. Fair Isaac currently offers scoring models for the U.S.A., Canada, and South Africa. It also offers a "Global FICO" for many other countries across the world.