Our credit scores determine the approval or the denial of our major purchases. It has a defining factor which most lenders, banks and financial institutions rely on. The most commonly used scoring method is the Fair Isaac Company or FICO scoring but it is an important thing to know that the credit scores are not directly coming from FICO, it is actually generated by the major credit reporting agencies.
Credit scoring is defined as a system used by creditors to determine whether to grant or deny a loan or credit card for instance. Among the criteria these scoring are using is the payment history on a persons account which is weighing a large bulk of 35%. Also an outstanding debt record is given a 30% weight. Another is about how long one has been a credit user which carries 15%. 10% was allotted to the very recent credit activities and another 10% is coming from a mix of credit one hold, including installment loans, leases, credit cards and mortgages.
One must not expect that the credit score generated by the three major credit reporting agencies will be the same. This is due to the different information provided for by financial institutions, banks, creditors and lenders to the bureaus.
As mentioned earlier FICO scores are the most widely used scoring method however it is not the only credit bureau scores. Furthermore even the three major credit reporting agencies have their own version of the FICO scoring method. For instance Equifax has the BEACON score, Experian ha the Experian/Fair Isaac Risk Model and Trans Union has the EMPIRICA score.
It is also wise to know that the FICO score is not constant. This credit score changes as your free credit report contents change. Moreover, even the method itself is subjected to changes.
FICO scoring started in 1958 and was designed to address investments but when the credit cards became popular in 1970 the credit scoring was updated to rate individuals.
Recently an innovation happened with the FICO scoring system which was called FICO -08 which aimed at lessening the impact of a payment or two. In this new system the credit score ranges from 300 to 900 which is still determined by the credit history of the person. Minor delinquencies of $100 or less that are over 2 years have now the probability of being ignored by the system. Also those who are piggybacking would not be considered anymore by this new scoring system.
Credit scoring systems are unique, for creditors are basing the factors not independent of their services offered. They have to have determinants suited to the characteristics a customer must have to be worthy of credit.
