Most of you have heard of it, but what is a credit score?

The most widely used scoring model in the United States and Canada is the FICO credit score. Developed in 1956 by a company called Fair, Isaac & Company (FICO), this model is designed to determine how likely you are to become 90 days late on any payment within the next twenty-four months. The model calculates the probability of loan delinquency.  It does so by comparing patterns in your credit history against the patterns of millions of other consumers.

FICO makes all these comparisons with software that uses complex equations and advanced analytics.  The comparison evaluates all the data in your credit report and distills it into a standardized, three-digit score.

But, let’s back up a minute. Where does all the credit report data come from?

Each financial choice you make – how much you spend on credit, how responsibly you pay down your debts, how many credit-related accounts you have, etc. – gets reported to three credit reporting agencies: Equifax, Experian, and TransUnion. When a lender orders a copy of your credit report, they also usually request the accompanying FICO credit score.  The report boils everything down into a single score based on that agency’s proprietary version of the FICO scoring model.

It’s important to note that while FICO works with the credit agencies, they do not control the information in your credit reports. Fico translates the data provided and returns a standardized score. So, to summarize:

  • You make financial choices.
  • The lending entities you interact with (banks, retailers, etc.) report your choices to the three credit reporting agencies.
  • The agencies use the FICO software to turn your data into a single credit score, which is then delivered to the lender reviewing your application for credit.

It may seem like there are a lot of moving parts, but because the choices you make drive the entire process, ultimately you’re the one in control. In fact, statistics show that, given thirty days, over 80% of loan applicants have the potential to improve credit scores.



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