FICO Credit score reporting was non- existent when credit cards first began to appear in the 1950’s. Extension of credit and lending (making of loans) at the time were almost entirely subjective. For the most part a lender or credit analyst followed their own judgments when granting or denying loan or credit requests, a process that required days or weeks. Lending institutions of the day such as banks and other financial institutions tended to be locally based and decisions were likely to be made on a personal basis. This arrangement on one hand put lenders at risk of customers defaulting on their payments. On the other hand, lenders tended to be overly conservative, and discrimination based on age, sex, marital status, and ethnicity was rampant, making credit unavailable to many.
During the the 1950s, FICO credit score reporting although unheard of got its beginning when two men William R. Fair, a mathematician with degrees from the California Institution of Technology, Stanford University, and the University of California at Berkeley, began investigating mathematical techniques for use in building models of predictive behavior. Fair was attracted to the relatively unrecognized complexity involved in the credit decision process, finding that the variables typically used in determining credit could produce trillions of possible combinations. Fair determined, however, that by using statistical techniques, such as multivariate analysis to produce scoring algorithms, this complexity could be greatly reduced. Furthermore, recent advances in computer technology, especially the introduction of transistors, allowed calculations to be automated and processed quickly. Joined by Earl Isaac, an electrical engineer, Fair started up a management consultant companyas a 50-50 joint venture in 1956. As Rosenberger told Investor’s Business Daily, “Some firms are founded to create wealth, but this firm was born in 1956 from a desire to do things the partners liked to do.”
In 1958, Fair, Isaac introduced their first credit reporting scoring system, called Credit Application Scoring Algorithms, proving that their system could accurately predict the payment behavior of credit holders, including whether they would pay on time, pay late, or not pay at all. Two years later, Fair, Isaac launched the first version of the company’s INFORM product, a process for building scoring algorithms based on a customer’s database of past borrowing behavior. In that year, the pair incorporated the company as Fair, Isaac and Company.
Credit lenders were slow to adopt any credit score reporting partially due to technology . We have moved a long way from then when computer anything was not quickly accepted in part because of the slow penetration of computer technology into mainstream commercial use, clinging to traditional judgment-based decision-making methods and relying on credit bureaus, which reported on an individual’s past credit behavior. Fair, Isaac received a boost, however, when the Internal Revenue Service (IRS) contracted the company to develop a scoring algorithm that would enable the IRS to locate tax evaders more accurately. That system, put into place in 1972, quickly produced results: The number of audits dropped by a third, and the IRS posted a higher level of uncovered underpayments. During the 1960s, Fair, Isaac attempted to extend their scoring system to employee hiring practices; although this attempt forecasted the flexibility of scoring, the company found little enthusiasm among businesses for such a system. At the end of the decade, however, Fair, Isaac moved to extend credit scoring, beginning research on a behavior scoring system for monitoring credit purchases and payments.
History now tells us credit score reporting witnessed a breakthrough era in the 1970s . The introduction of faster minicomputers led more credit companies to add credit scoring to their application process. In 1972, Fair, Isaac adapted its products for use with minicomputers, allowing credit applications to become fully automated. Credit scoring was also proving flexible enough to meet the variety of lenders’ needs. Using data gathered from a lender’s own database, credit scoring allowed the lender to build predictive models, and acceptance levels, based on criteria specific to the lender, its customers, and their region. Credit scoring had another advantage in that it was completely objective and non-discrimatory factors such as a person’s age, sex, or race held no place in a credit reporting scoring. Indeed, Fair, Isaac worked hard and has proven that these factors held no predictive value in determining an individual’s creditworthiness. Lenders were reluctant to set aside their prejudices, however. In 1974, however, they were forced to do so with the passage of the Equal Credit Opportunity Act, which barred such discriminatory factors from the credit equation.
Credit score reporting algorithms are complicated and FICO keeps theme confidential but FICO credit scores are designed to measure the risk of default by taking into account various factors in a person’s financial history. Although the exact formulas for calculating credit scores are secret, FICO has disclosed the following components:
Getting a higher credit limit can help your credit score. The higher the credit limit on the credit card, the lower the utilization ratio average for all of your credit card accounts. The utilization ratio is the amount owed divided by the amount extended by the creditor and the lower it is the better your FICO rating, in general. So if you have one credit card with a used balance of $500 and a limit of $1,000 as well as another with a used balance of $700 and $2,000 limit; the average ratio is 40 percent ($1,200 total used divided by $3,000 total limits). If the first credit card company raises the limit to $2,000; the ratio lowers to 30 percent; which could boost the FICO rating.
There are other special factors which can weigh on the FICO score.
There is one common American Dream at the core of our great country is the dream of home ownership. Credit score reporting absolutely is probably the most important to owning a home. Credit Reporting scores from FICO range from 350-800 and generally speaking 580-619 poor, 620-680 good, 680-800 Excellent. The better the FICO credit scores can often be a determining factor for approval or denial but also the rate of interest a borrower will pay. Knowing what FICO credit reporting is and the impact on home ownership can become a tool for personal advancement. Financial discipline can be crucial to success or failure of the American Dream of home ownership. There are many good resources and excellent advice at Gustan Cho associates or forums for professionals of the Real Estate and Mortgage industry. We at the Larry Stepp Team would like to make ourselves available to inform and educate, we are available 7 days a week, holidays and weekends.
Larry Stepp LarryS.HomesNetwork@gmail.com 407-922-4755