Financial Dictionary -> Debt -> FICO

FICO is an acronym for the Fair Isaac Corporation, the company that pioneered the credit score calculation. Whenever one opens a credit card account, obtains a loan or any type of financing, credit score is used as a basis for determining if the account or loan should be granted or not.

The credit score is referred to as FICO score, standing for a reliable way to check the credit worthiness of a person or business entity. Today, about 80 countries work with FICO, with Fair Isaac offering scoring models for the United States, South Africa, Canada, etc. In general, the FICO score provided by credit reporting agencies is helpful in managing risks, cutting on losses, and making sound financial decisions. BNI is a separate score, used to asses the likelihood that a borrower will declare bankruptcy. In addition, the Fair Isaac Corporation employs different methods to rate one's suitability for three types of loan - consumer credit, automobile loans, and mortgages. The three credit instruments come with different default risks which are taken into account.

The top three credit reporting agencies, Equifax, TransUnion and Experian use the FICO algorithm, and most if not all financial institutions rely on the score to assess the credit worthiness of potential borrowers. While FICO is the most widely used score in the United States, there are others, such as CE Score, VantageScore, and NextGen.

How FICO Determines Credit Score

There is no clear-cut answer to this question as many factors impact on the score. It can be said that scoring is determined on an individual basis. However, several factors affect scoring, including late payments, collections, bankruptcies, current debts, length of credit history, types of credit, and new credit applications. Each of these factors contributes to the overall score in a different way.

How Is the FICO Used?

Clients can obtain their FICO score from any credit reporting agency. Once a month, the credit reporting agencies refresh the credit data to come up with up-to-date scores. Because each agency has different data on the consumer's financial history, the FICO score may differ slightly from one entity to another. For this reason, lenders get the FICO score from all three top credit reporting agencies for comparison. The middle score, and not the average, is the one that determines the actual FICO score.

Raising the FICO Score

There are several ways in which consumers can ensure that their FICO score goes up or remains high. When it comes to establishing a good credit standing, there are three basic issues to consider. The first is to borrow money that you can easily pay without running the chance to default on it. Second, it is best to borrow only about 30 percent of the total credit available. Finally, you should make your payments on time, as opposed to marring your credit history with late payments. When all three are observed, there is a good chance that the credit score will go up.

What it Means to the Consumer

Clients with a high FICO score are considered valuable customers by banks and other lending institutions. Being low risk for creditors, they enjoy preferential treatment, low interest loans and other financial services. A high FICO score tells lenders that the borrower will make payments on time and stick to the loan agreement.