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A FICO score is a credit score developed by Fair Isaac & Co. FICO / Fair Isaac & Co is the company used by the Experian (formerly TRW) credit bureau to calculate credit scores. Transunion and Equifax are two other credit bureaus that also provide credit scores. Credit scoring is a method of determining the likelihood that credit users will pay their bills. Fair Isaac & Company began its pioneering work with credit scoring in the late 1950s, and since then, scoring has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrowers credit history into a single number. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed. The Federal Trade Commission has ruled this to be acceptable. Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance.
Developing these models involved studying how millions of people have used credit. Score-model developers find predictive factors in the data that have proven to indicate future credit performance. Models can be developed from different sources of data. Credit-bureau models are developed from information in consumer credit-bureau reports.
Each time your credit report is pulled it is run through a computer program with a built-in scoreboard. Points are awarded or deducted based on certain items such as how long you have had credit cards, whether you make your payments on time, if your credit balances are near the maximum, and assorted other variables. When the credit report prints in your lenders office the total score is displayed. Your score can be anywhere between the high 300s and the low 800s.
Lenders wanted to determine if there was any relationship between these credit scores and whether borrowers made their payments on time, so they did a study. The study showed that borrowers with scores above 680 almost always made their payments on time. Borrowers with scores below 600 seemed fairly certain to develop problems.
As a result, credit scoring became a more important factor in approving mortgage loans. Credit scores also made it easier to develop artificial intelligence computer programs that can make a yes decision for loans that should obviously be approved. Today, a computer and not a person may have actually approved your mortgage loan.
In short, lower credit scores require a more thorough review than higher scores. Often, mortgage lenders will not even consider a score below 600.
Credit scores analyze a borrower's credit history considering numerous factors such as:
Late Payments
The amount of time credit has been established
The amount of credit used versus credit available
Length of time at present residence
Employment history
Negative credit information such as bankruptcies, charge-offs, collections, etc.
There are really three FICO scores computed by data provided by each of the three bureaus Experian, Trans Union and Equifax. Some lenders use one of these three scores, while other lenders may use the middle score.
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