About FICO Scores

In the US the lending world revolves around consumer scores. So what is a FICO score and how does it affect your purchasing power?
FICO scores were primarily built to assist lenders in determining a consumer's ability to handle credit in the mortgage industry. However FICO scores have spilled over into every day credit requests and influence almost every credit request you make. It can be helpful for consumers to be aware of how a FICO score is created, why it is used and how you can stay informed about your score.

History

FICO is short for "Fair Isaac Corporation." Fair Isaac Corporation is a publicly traded company that created a model by which they combined the credit history data held by the three major credit history companies (Trans Union, Experian and Equifax) with other data--percentage of on-time payments, length of credit history, amount of debt as well as how often you are requesting credit to be extended--all to produce a number that represents your credit worthiness. Using statistic calculations, Fair Isaac Corporation builds a credit number that represents a consumer's ability to handle credit.
There is a new grading system that is gaining popularity--the Vantage Score. The Vantage Score is being developed by the three major credit history companies to build a score that then correlates to a grade. For example a score of 701 - 800 would assign a grade of "C" to a consumer.

Significance

FICO scores were developed to give a quick way for the lending industry to determine the likelihood that a consumer will default on a loan or, in the worst cases, declare bankruptcy. When credit history tracking companies first appeared in the marketplace they only tracked histories. So Fair Isaac Corporation entered the financial lending world with an ability to produce a number that could be assigned to a consumer to be used by the lending industry and hopefully to help alleviate risky financial contracts.
Lenders can research your credit worthiness by checking your FICO score. Some companies will only look at your score while others will look at your score and your history, if they feel the detailed research will be necessary in the cases of negative transactions in your history file.

Types

While a personal FICO score is one number it is important to note that there are ranges between which your score will fall. Scores range between 300 and 850 with 300 being a very high credit risk and 850 being a very low credit risk. It's important to be aware that FICO scores are constantly being recalibrated. So, while your score may be low today, over time you have the ability to raise your score and your perceived ability to handle financial risk. While that is advantageous, it's important to note that the reverse can also happen. Your once envied high FICO score can deteriorate leaving you with lenders that will discontinue offering you low interest rates or any credit at all.
In lending institutions, a consumer with a low credit score will usually be offered higher interest rates, may be required to have collateral, or more collateral than someone with a higher score or may require more documentation of their assets and liabilities prior to receiving any money on loan for a mortgage, vehicle loan or personal loan. Note that other credit providing companies, such as utility, insurance, gas and water, also use scores to determine your credit worthiness. If they find a score to be unattractive, a consumer will usually be asked for a deposit prior to opening an account.

Misconceptions

Many people feel that there is only one score and that it is the FICO score. Seeing the advantage, in the lending industry, of identifying consumers with a number, there are many companies that will provide scores for consumers to bankers, mortgage companies and other lending institutions. It all depends on which company the lender is dealing with. The difference in how each company builds its scores can, and does, mean that an individual consumer can have a different score from each different company. However, the point range is not usually going to make a significant difference in the lending rate you are offered. If you feel that the lending rate you are being offered isn't where you thought it could be, it may be in your best interest to find out which score creation company they are using and find out if the score provided to the lender is where you believe it should be.
Another misconception is that FICO is only one score when, in fact, Fair Isaac Corporation produces a different score based on the type of credit you are looking to acquire; for example a mortgage lender, a personal loan lender and a vehicle loan lender may all receive a different FICO score for one individual consumer, which could affect your interest rate negatively or positively to a small degree, usually.

Considerations

Here are other companies that sell individual consumer credit scores:
TransUnion produces four different scores, namely Precision 03, Precision, Empirica Auto and Empirica.
Equifax produces four different scores, one named Pinnacle and three named Beacon (0, 5.0 and 96).
Experian does not produce it's own score. They use the FICO scores from Fair Isaac Corporation.
MyFICO.com produces the MyFICO score.
Community Empower produces the CE score.
NextGen offers their own score.