The FICO score was developed by a company called Fair Isaac Corporation, as a standardized way to measure credit risk and add a measure of predictability to the behavior of borrowers in relation to the lending of money. Today, it is the most used measure of credit risk in the world, and is used by all of the major consumer credit reporting agencies in America.
Your FICO score – also called a “credit score” – is based on the information in your credit report, which is usually sourced from the three major credit bureaus. The information in your credit report reflects your bill-paying history and debt profile. If you are late on a payment by 30, 60, or 90 days, that will be noted in a credit report. If you default on a loan or a credit card, or if a bank has to “charge off” a debt that you incurred, those will be noted on the credit report as well. All of these factors will be analyzed when determining your FICO score.
Using this score, lenders will determine the likelihood of your default on a loan, and whether you will make timely payments if they lend you money. The purpose of the FICO score is to make that assessment easy and standardized, and allow lenders to compare the standing of borrowers at a glance.
What is the process used to determine your FICO score from this information? It’s somewhat mysterious but there are several factors which play a part in your overall score. 35% of your score is based on your payment history. 30% is based on the amount you owe. 15% is based on the length of your credit history. 10% depends upon the types of credit you use, and another 10% is determined by any new credit you take on.
Banks, credit cards and other lenders use your FICO score to evaluate the potential risk of lending money to you. Having a good FICO score means you get better rates, higher credit limits, and other benefits. It’s important to know your credit rating if you plan to apply for a home loan, car loan, or any other form of credit.