by Dave M Williams
FICO is the acronym for Fair Isaac Corporation, and FICO score is the most renowned model of credit score used in the United Sates. Using the information of the credit files of a consumer, FICO score helps the banks and credit card companies take the decision if that consumer should be lent money or not. Moreover, the FICO score also determines, by analyzing statistically the credit files of the consumer, the interest rate, and the amount of money or credits to be lent. In other words, to make things simple, if a consumer’s FICO score is low, and if he wants to lend money, he will be charged higher interest rates, and will be demanded of more collateral.
FICO, Fair Isaac Corporation, started as the pioneer of establishing the credit score system; it was 1950’s, and ever since credit scoring has served to the lenders as ‘the’ effective system of its kind. What FICO score does is to convert the whole credit history of the consumer into a single number. What is interesting to note is that Fair, Isaac and Co. does not say exactly how this computation is done, but this act of not revealing has been accepted by the Federal Trade Commission.
FICO score analyzes statistically a consumer's credit history in consideration with various things like if the consumer has the habit of giving late payments, the credits used by him in contrast with the available credits, if there is some negative information like bankruptcies etc. The company follows the rule dictated by the Federal Reserve Board to base the scoring on a high statistical system, and not on race, national origin, color, marital status or sex.
There are some tips and techniques to increase the FICO score of a person, though it should be borne in mind that nothing can help to increase the score in a fortnight; it takes a considerable amount of time. To increase the score, one should take care to pay bills on time(late payments really hamper your score), not to apply for credit in frequent successions, and to keep the credit-card balance reduced.
Another thing pertinent to note here is that the company uses different types of scoring techniques depending on the types of credit, namely mortgages, automobile loans, and consumer credit, which means that these scores can be different(even to the extent of fifty points or more) even if the same person is the borrower.
So the advantage of the FICO score is evident; it really helps the lenders to judge the person whom they are lending the money. But, there are some negative points also in this system. Most importantly, the lenders can exploit this system in a negative manner, and may not lend money to somebody, or even can take some steps against them. So to take care of that, the Federal Reserve Board has clearly mentioned that if anything like denial of application for borrowing credits happens, the lender should provide concrete reasons for the denial. In other words, the lender can not say that they did not lend money because the consumer’s FICO score is not enough.
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