FICO score is one to the measures that are used by the lenders to assess the credit risk of an applicant, and then decide whether to extend loan to them or not. FICO score makes an important part of the credit report. An acronym for Fair Isaac Corporation, the FICO score is one of the types of credit score. It is named after the creators of the FICO score, and was introduced the first time in 1989. The system of FICO score is used widely these days by most of the credit providers, and banks before they provide loan to any consumer.
More about FICO Score
There are five areas that are taken into account when it comes to calculating the FICO score of any applicant. These areas include current level of indebtedness, payment history, length of credit history, types of credit used, and new credit. Within these areas, there are a number of factors that are taken into account, and calculated through mathematical models before it is decided whether loan should be given to a certain person or not.
The range of the FICO score of a person is generally between the ranges of 300 to 500. A FICO score of above 650 depicts that the concerned individual has a very good credit history, and lending money to such a person is highly recommended. On the other hand, if the FICO score falls below 620, it becomes difficult for the person to obtain financing, and that too at a favorable rate.
FICO score, also known commonly as the credit score is used by credit card companies, and banks to evaluate, and determine the risk that is posed by lending money to a specific consumer. With a widespread use of FICO scores done by the credit companies and banks, credit has become more widely available and in less expensive rates across many countries.
The FICO and other credit scores are widely used because they are largely reliable, and fairly inexpensive; however, they too have some shortcomings like:
- They are not very good predictors of risk
- Can be gamed easily
- Is used in employment decisions
Other than these concerns, FICO score is widely used all over the world when it comes to checking the credit worthiness of a consumer.
Further Reading
- Does Knowing Your FICO Score Change Financial Behavior? Evidence from a Field Experiment with Student Loan Borrowers – www.mitpressjournals.org [PDF]
- Payday loans and credit cards: New liquidity and credit scoring puzzles? – pubs.aeaweb.org [PDF]
- Cognitive abilities and household financial decision making – www.aeaweb.org [PDF]
- Learning to cope: Voluntary financial education and loan performance during a housing crisis – pubs.aeaweb.org [PDF]
- Stability in consumer credit scores: Level and direction of FICO score drift as a precursor to mortgage default and prepayment – www.sciencedirect.com [PDF]
- Regulating consumer financial products: Evidence from credit cards – academic.oup.com [PDF]
- From new deal institutions to capital markets: Commercial consumer risk scores and the making of subprime mortgage finance – www.sciencedirect.com [PDF]
- Cause and effect: government policies and the financial crisis – www.tandfonline.com [PDF]
- Anatomy of the credit score – www.sciencedirect.com [PDF]
