Financial Fact Friday

A FICO score, often referred to as a credit score, is a three-digit number that is used by creditors and lenders to assess an individual’s creditworthiness. The term “FICO” stands for Fair Isaac Corporation, the company that developed this scoring system. FICO scores are based on the information in an individual’s credit report and help lenders make informed decisions about extending credit, such as loans or credit cards.

Creation: The FICO score was created by William R. Fair and Earl J. Isaac, who founded the Fair Isaac Corporation (now known as FICO) in 1956. They developed the first credit scoring system in the 1950s, which laid the foundation for modern credit scoring.

Purpose: FICO scores were created to provide a standardized and objective method for evaluating an individual’s credit risk. Prior to the development of credit scoring, lending decisions were often based on subjective criteria, making the process less consistent and more prone to bias.

Components: FICO scores are typically based on several key components, including payment history, amounts owed, length of credit history, new credit, and types of credit used. These factors are used to calculate an individual’s credit score, which can range from 300 to 850, with higher scores indicating better creditworthiness.

Impact: FICO scores have a significant impact on an individual’s ability to obtain credit and the terms of that credit. A higher FICO score can lead to more favorable loan terms, lower interest rates, and easier access to credit, while a lower score can result in higher interest rates and limited access to credit.

Use: FICO scores are widely used by lenders, banks, credit card companies, and other financial institutions when making lending decisions. They are also used by landlords, insurance companies, and employers in some cases to assess an individual’s financial responsibility.