A FICO credit score reflects the information contained within a credit report. The use of credit scores helps lenders determine approvals or denials of credit applications. How a consumer handles his finances contributes to how high or low a credit score will be.
History
Fair Isaac Corporation invented the FICO scoring model in 1989. The endeavor was a joint venture with Equifax and the score was known as BEACON at the time. According to Bloomberg, it's the scoring formula most widely used by U.S. lenders.
Significance
Credit issuers use FICO credit scores to gauge how well a consumer handles his financial obligations. A lower score generally indicates a risky borrower whereas a high score indicates that the borrower will be less of a credit risk to the lender. A higher score usually leads to lower interest rates.
Features
A FICO score numerically reflects consumer behavior. Of the total, 35 percent measures how consumers pay bills; 30 percent is how much debt the consumer has; 15 percent is the length of credit history; 10 percent is new credit applied for; and the final 10 percent is the types of credit the consumer has, such as a mortgage, car loan or credit card. FICO scores range from 300 to 850.
Misconceptions
Credit scores do not take into account the age, race or marital status of the consumer. It also does not include payment history on utility bills, cell phone bills or insurance, unless the consumer defaults on those items. In that case, the creditor may report the derogatory account to the bureau.
Warning
Various companies on the web sell or give away their own versions of a credit score based upon their relationships with the credit bureaus. Lenders don't usually use these scores and reliance upon them could mislead the consumer as to the actual status of his credit standing.
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