What is FICO

by John_S on December 5, 2010

FICO is an acronym that stands for the Fair Isaac Corporation, a company providing solutions and mathematical formulas for the purpose of credit scoring. Scores are particularly important for the financial companies because they often use these as the basis for important financial decisions – e.g. granting loans to potential customers. FICO is based in Minneapolis, MN, United States, but it also runs branches on the territory of North America, Europe, Asia, Australia and South America.

Brief History of the FICO Score

The Fair Isaac Corporation was established as a pioneer credit scoring company in 1956. About two years after its incorporation, the entity sold its first system for credit scoring. Other systems were also developed in the following years, thus making the business go public by 1987. In the same year, the first ever FICO score was introduced. The score is now available from all major credit reporting bureaus all throughout the United States and Canada.

The Score and Impacting Factors

The FICO score is just another way to refer to one’s credit score. The factors that impact on it include payment history, length of credit history, amount owed to various debtors, types of credits used, as well as new credit. These factors influence the total FICO score at different percentages depending on their importance. 

To determine the credit score of an individual, all these variables are taken into account. Keep in mind that the credit score cannot be determined by using just one or several of the above categories. Since credit score is a very important factor in decision making, its computation relies heavily on all these.

FICO calculates the score of each individual in a different manner. Therefore, the impact of one factor on the overall score varies from person to person. There is no fixed method to determine the credit score because all categories are in essence variables. Thus, it is safe to say that the computation of one’s credit score will depend on the circumstances for which it was calculated (e.g. repeated defaults on loans).

To come up with a credit score, FICO only uses information found in the credit report. While lenders may look at other factors, such as the borrower’s income, job position, or type of credit, FICO focuses on what is found in the credit report, ensuring objectivity towards the borrower. In addition, the company also includes both negative and positive data from the report to establish the score. Late payments, timely payments, and other factors affect the overall score.

Building a Positive Credit History

The actual formula that FICO uses is not made available to the public. Only the company and other involved institutions have access to precise information on the method. For this reason, it is difficult to decide on what factors really count the most when you try to attain a higher credit score. To be sure, it is best to avoid late payments and anything that has a negative impact on your credit worthiness.

The safest way to raise your credit score is to make regular payments and avoid defaults. While that is not easy and fast, you need to show responsible financial behavior as to protect yourself and your family from potential financial troubles in the future.

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