| By Greg Fisher
A credit score is a number that summarizes information on a person's credit report.
Nearly synonymous with the term credit score, a FICO score is one of a line of various numbers developed and marketed by the Fair Isaac Corporation. One of its broad-based credit bureau risk scores was first deployed in 1989 by Equifax under the name BEACON. Certain FICO scores are the only scores designated by Fannie Mae and Freddie Mac for mortgage loan evaluation, and the brand name is even in a glossary maintained by the U.S. Department of Housing and Urban Development. Not only is the algorithm used in the primary, consumer market, it is a standard of quality for investment market instruments.
Scale and range
As stated by Fair Isaac, the scale of some FICO scores is 300 to 850, and thus, the range is 550 (technically, 551, if the two extremes are included). The higher the number, the lower the risk of lending money to that person. The reason for the peculiarly odd scale is, perhaps, to differentiate it from other credit scores—although the FICO's extreme success and ubiquity make that irrelevant. FICO sued a competitor over the idea of the 300-850 scale. In 2011, the competitor, VantageScore, stated, "TRUTH: VantageScore is not a 'look alike score,' and in fact doesn't even use the same scale as FICO." In 2013, VantageScore changed its scores' scales to the same as those particular FICOs.
While the general FICO is a general-purpose score, Fair Isaac sells other algorithms (formulas; formulae) for specific markets. Auto and credit card ("bankcard") score models by the company have their own, equally esoteric numbers: 250 to 900. Closer still to a logical 0-1000 scale, the FICO NextGen is 150-950. There are score in Canada with a 300-to-900 scale.
Within the basic FICO score realm, there are new and old versions (of "models"), including those called FICO 8. Recently, Fair Isaac mentioned FICO Score 9.
Before 2001, citizens had no access to any FICO score. Last century, merely asking for ones' score was met with flat-out refusal and the question (regarding loan applications): "As long as they're approved, why do you care?"
One argument against giving consumers access to a credit score was framed by the question: "Well, again, what scores?" The answer to that exasperated consumer reporting industry representative is obvious: The score used. Now, using that simple idea, a friendlier law defines actions lenders must take regarding credit score disclosures and risk-based pricing notices provided to consumers who apply for credit. Another argument for credit score-secrecy revolves around an old theory: A person who knows he is watched acts differently than he would normally.
But, something so ubiquitous, fundamental and commonplace could not stay in the shadows for long. On March 19, 2001, a victim of its own success, Fair Isaac relented, and, again with Equifax, provided a BEACON FICO to citizens. Access to a TransUnion (then Trans Union) FICO score version followed the following year. And, completing the troika, Experian provided a FICO in 2003, although that access ended in 2009. In 2013, Experian and Fair Isaac came to an agreement to give consumers access to credit scores, and an Experian-based FICO score is now available on myFICO.
Other credit score brands
With the national obsession of credit scores, Fair Isaac's competitors see a huge market for selling numbers to consumers. Experian, sells its PLUS "educational" credit score from its home page, TransUnion provides VantageScore, and others. But, for consumers, since there is access to the favored credit score brand, there is not much of a point.
Improving one's credit score
Today, a decade after the release of FICO scores to consumers, there are any number of resources to help you improve your standing with lenders. Disclosures recently required by federal law provide insights for financial service applicants. Fair Isaac even maintains a forum for citizens to discuss credit scores and their many facets.
But perhaps the best–and certainly the most expedient–way to attempt to solve the mystery of your credit score is to use the FICO score simulators. While a small fee is required, they are the only known tool providing direct access to your credit report, credit score, reasons that it is not higher and suggestions to improve it. The simulators give a general suggestion for improvement, and allow you to submit what-if scenarios to determine the likely outcome of particular actions (i.e., what if I get another credit card, pay down a balance, pay off an account, miss payments, etc.).
The information available will only get a person so far, though. In this bleak landscape, even an average score is unknown to the public.
Myth, misinformation and misunderstanding
The basis for this website, creditscoring.com (first published in 1998), was begun in 1997 to open the inevitable dialogue about the notion of credit scores. Then, the big secret was backed-up by contracts. The impetus for the Credit Scoring Site occurred the previous year, when Congress passed a law that allowed-- outrageous as it now sounds-- consumer reporting agencies (credit bureaus) to keep credit scores secret. Since then, growing in parallel with the wild trajectory of expansion of the internet, information about credit scores has expanded and improved while on many points (inevitably), it worsened.
An example of the negative side of freer information is the urban legend that employers use credit scores. In fact, the main three CRAs have all stated, emphatically, that employment credit reports do not include scores. Disappointingly, however, all contradicted themselves, stating (inaccurately) that employers do use credit scores. Experian exclaims a disturbing trend in a headline, "More Employers Check Applicants' Credit Scores." The myth has had serious consequences, worming its way into statehouses and acting as a basis on which actual laws have been created. It is difficult to watch. You can find it almost anywhere: The Los Angeles Times, Chicago Tribune, Washington Post and the New York Times (Page A2 is written by the author of this website, creditscoring.com).
- An unfortunate misinterpretation of the general-purpose FICO score distribution
- An overstated importance of the proportion of balances to credit limits, or, the so-called "utilization ratio"
- The effect of inquiries on a credit score
- The effect of closing accounts
- Any number of emphatic statements of the national average credit score figure
For citizens, knowing what is not true is as important as the truth, itself.
What score it takes to get the best interest rate is the essential question, although some strive and stumble for the heights for vanity or sport. Using various words, charts, meters, colors, break-downs and other metrics, industry tries to attach qualitative meaning to the numbers. But a score is just a score—there is no good or bad unless you consider the extremes: 300 is definitely bad, and 850 is, to be sure, good. While there is no zero, it is possible to have no score, too (if you have no credit file or one too limited to score).
So, good in this ranking system is in the eye of the one who holds the gold. Fortunately, to find out what that means, recent legislation created a fairer playing field between banks and consumers: Disclosures provide a person's actual credit score used in the lending decision and other information. It's not perfect and took too long to happen, but it's a start.