Abstract
FICO is an acronym for “Fair Isaac Company,” a company that created the original scoring model. FICO is a mathematical model also known as BEACON from Equifax, or NEXTGEN that is used by lenders such as banks, mortgage loan companies, mobile phone companies, insurance companies, employers, government departments and merchants to determine the credit worthiness prospective loan applicants. A prospective borrower’s credit report contains credit data like FICO scores, which the lender uses to evaluate the credit risk of a prospective borrower because it represents past credit behavior and assesses likelihood of the behavior in the future. This behooves the credit user to establishing and maintains good credit track record like regular payments, which raises a FICO score. (Gentile, 2008). According to Fair Isaac Corporation there are three major credit reporting agencies; Equifax, Experian, and TransUnion in United States which maintain records of users of credit and other information about them.
FICO score are calculated from various credit data categories. First is the payment history, which is information on specific account payments, delinquencies or felonious behaviors such as Gambling, Bar or Nightclubs hopping determines the type of accounts on the payment reports but most important is what was done to amend the delinquencies.
These are account activities since the beginning of each accounting period. Late payments lower a FICO score promptly but the score profile can be amended into a good FICO score with the re-establishment of a good track record.
Secondly is the number of new accounts opened for multiple credit cards holders, new credit inquiries, type of accounts, and re-establishment of good credit following past payment delinquencies. Recent and newly applied for accounts may negatively affect FICO score.
Thirdly is the types of credits in use, which includes information of specific kinds of accounts used such as credit cards, lines of credit, mortgage loans, and retail accounts. Loans from finance companies generally lower your credit score. Lastly is the outstanding depts. Current debts are amounts owed on specific types of accounts, account balances, percentage of credit cards used, and loan installments outstanding. If amount owed is close to credit limits, then a negative effect on FICO score is anticipated. (Cruise,2004).
Many different activities may influence the credit worthiness of a person but good FICO score is achieved though the information in the credit report and is not influenced by the company indebted or information not found in the report. Therefore the borrower should keep credits low by paying rather than revolving round it. Payment history is the most important factor of consideration to FICO. (Fair Isaac Corporation, n.d.).
Conclusion
Different lending companies may consider different factors so as to issue credit. Credit scores are used to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad dept. Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits But there are still other factors, not just FICO scores, used by lenders to evaluate the credit worthiness and behavior of a prospective borrower. In line with Fair Isaac Corporation, past credit poor performances on FICO scores fades as time passes.
Work Cited:
Cruise, C. (2004). Factors Affecting Your Credit Score, All About Credit Reports. CLC inc. Retrieved August 3, 2008, from http://www.allaboutcreditreports.com/CreditScore.cfm
Fair Isaac Corporation. (n.d.). myFico. FairIsaac Retrieved August 3, 2008, from
http://www.myfico.com/
Gentile, K. (2008, July 17). The Five Factors Affecting Your FICO Score. Retrieved August 3, 2008, from http://ezinearticles.com/?The-Five-Factors-Affecting-Your-FICO-Score&id=1334775
