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Chances are good that you have heard people talking about their FICO in conversations concerning their credit reports and credit scores. However, many average consumers arenít aware of the exact meaning of a FICO and how it was invented, let alone what it means to them. In order to understand what it is and how it can affect you, the following paragraphs will help you to comprehend the meaning and purpose of the FICO.
Around 1956, two very intelligent men came up with an idea for a way to evaluate the risk associated in extending credit or making loans by banks. The men were named Bill Fair, who was an engineer and Earl Isaac, a mathematician. Together, they formed the Fair Isaac Corporation and came up with the first system of scoring credit for bank credit cards in 1970. The Fair Isaac Corporation only can provide ratings for analysis and cannot be held accountable for accuracy in the report itself.
A registered trademark of the Fair Isaac Corporation, the FICO, has been used to analyze evaluate consumer debt, credit card debt, secured debts and also the potential loss or risk factor of granting any additional credit.
Any type of a lender that is going to grant credit to a consumer, like a bank or credit card company, will check the FICO in order to determine creditworthiness. Once it has been established that the consumer is, in fact, worthy of obtaining credit, other factors will then be decided. Such additional factors are credit limits, term of credit and interest rate.
There are various methods used by credit card companies and banks to verify a consumerís creditworthiness and the FICO is just one of them. Other ways include such things as calculating the debt to income ratios and finding out whether they have enough disposable income to repay the credit cards or loans. Lenders will fill out a basic debt worksheet and balance the amount of income on one side, while subtracting the amount of debts on the other. The result will be the amount of disposable income that is left for them to pay additional credit debts that they may incur.
Creditworthiness is the overall likelihood that the consumer can afford the new debt and will not default on their responsibility. Each one of the credit bureaus use an individual mechanism to arrive at the analysis of credit data which is the consumerís credit score. Credit scores are based principally on information that is reported to the credit bureaus by outside parties. There are three major agencies that report this information; Trans Union, Equifax and Experian, which mainly uses the FICO.
You should check your FICO and the other factors on your credit report at least once a year. This will eliminate any potential surprises at which time that you are applying for a loan or a credit card. According to the Fair Credit Reporting Act, or FCRA, every consumer is entitled to one free credit report per year that will include any information that the file contains, as well as the names of any inquiries.