Credit Education

03. Aug, 2016

What is a FICO Score?

The FICO (Fair Issac Corporation) credit scores are the most widely accepted measures of credit across the USA. The vast majority of bank and credit card companies use them to check credit worthiness, and decide what loan terms to offer. A high FICO score makes it much easier to open a credit line on good terms. The FICO score range begins at 301 and ends at  850. Generally, anyone with a FICO score above 700 makes it into the good credit category. Approximately 60% of Americans have FICO scores around 700. One estimate gives 723 as the most common (median) FICO score.

What is considered a good or bad FICO credit score changes with context. The mortgage bank manager expects to see a score well into the 700s before she authorizes a huge mortgage. However, in the case of a $750 loan, a FICO score in the low 600s might be fine.

Who Calculates FICO Scores?
The three big credit bureaus – Equifax, Experian and TransUnion – make FICO score calculations. Financial institutions and some government agencies supply these credit bureaus with their customers’ financial history. This information typically includes records of payments made on time, missed payments, bankruptcies, legal judgments, and other financial details.

The bureaus compile credit reports based on the customers’ credit history. A good credit report includes no loan defaults, delayed payments, or other events likely to make a new lender think twice making a new loan. This excellent financial record contributes to a high FICO score. Lenders view this customer as a good risk, so they feel able to offer generous terms.

Each of the major credit bureaus has their own FICO score calculation method. In addition to differences in method, the financial history data they receive also varies – not every creditor reports to all three bureaus. Consequently, people have three FICO scores instead of one and numbers need not match. FICO scores for the same customer can easily differ by more than 30 points between bureaus. This creates situations where a customer might be a bad credit risk according to Experian but less of a risk to TransUnion.   

Who Gets to See FICO Scores?
US law gives credit bureau customers the right to see their FICO score. However, while annual credit report copies come free of charge, bureaus may charge for FICO scores. If the customer wants to open a new credit line, the lender has a right to see their FICO score. Some suspect that prospective employers also see FICO scores but don’t have this right. Credit bureaus may supply a special version of the credit report but not score details.

Are FICO Scores Fair?
FICO scores offer a quick, easy-to-understand sign of good or bad credit. However, are these scores reliable? Some critics point out how the system is balanced against certain sections of the population. Credit bureaus like to see long credit histories. This helps them make a more accurate summary of the customer’s credit standing. However, a young person at the start of their career lacks credit history. Without this history of steady financial behavior, the bureaus will not give a good credit score. Why should a young person find it hard to get credit when there is no evidence of irresponsible financial management?

People also complain that mistakes and missing data in credit reports contribute to their poor FICO scores. It takes a tremendous amount of effort and time to dispute these errors and get them corrected.  

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