Credit Score - FICO Score, Scoring Models
Written by: Kristy Welsh
What is a Credit Score?
A credit score is a three digit number which is calculated by using a mathematical algorithm using your data-rich credit report. It is designed to predict risk and specifically, the likelihood you will become seriously delinquent on your credit obligations. Lenders use credit scores to determine who qualifies for a loan, at what interest rate they will charge, and what credit limit they will give to a borrower.
The use of credit scoring prior to granting credit is an implementation of a industry trusted system that has been in place for years. To put it plainly, the lower your credit score, the more likely you are to default on the repayment of outstanding debts - at least in the eyes of the lender looking at your credit score and credit reports.
There are a multitude of credit scoring models but the one that dominates the credit market is your FICO score. FICO stands for Fair Isaac Company and was founded by two men who derived the first method of quantifying a person's credit worthiness. They pitched their idea to lenders back in 1956 and as they say, the rest is history.
According to recent statistics, 90 percent of all financial institutions in the U.S. base their lending decisions on a FICO score. A FICO score ranges from 300 to 850, where the higher the number the better your credit.