Fico score details
What are FICO scores?
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The term refers to any score generated by a model developed by Fair Isaac Company (FICO). That said, in common parlance it refers primarily to FICO scores generated based on credit bureau data. What they predict and the scales used are quite consistent, which allows comparison from one bureau to another. According to Experian, the scores can be interpreted as:
800 and above— exceptional (default rates under one percent);
740 to 799 —good, and above average
670 to 739 —average, somewhere around the median
580 to 669—fair, but below average
low to 579—poor, indicating high risk.
Many small credit providers will base their lending decisions solely upon the FICO score, because the cost and complexity of developing their own models are too great. Larger lenders may develop their own models based upon their own internal data combined with the scores, or use the raw bureau data directly. Irrespective, most of the public sees the FICO scores as an indication of their own financial health, and their key to accessing credit.
FICO was established in 1956 San Francisco by Bill Fair and Earl Isaac, an engineer and mathematician respectively, and their first engagement was the construction of a credit card billing system for Carte Blanche (offered by Hilton Hotels). They believed it possible to develop a credit scoring model to assess new loan applications using operational research techniques, and proposed the concept to 50 potential clients by a mail shot. Only American Investments responded, and their first scorecard was successfully implemented in 1958. This was not the first-ever scorecard (the first was in 1941), but it made them the first in the scorecard business.
At first, credit scoring was a hard sell to finance houses due to entrenched attitudes and practices. They were able to get a significant contract with Montgomery Ward in 1963, which allowed the centralisation of what were then branch-level back-office credit functions. This then extended to R.H. Macy, Gimbel’s, Bloomingdale’s, and J.C. Penny. Later in the 1960s, oil companies started using the models to as part of their mail campaigns, as did Diners Club, American Express, and Carte Blanche. The first bank was Connecticut Bank and Trust in 1970.
At this stage the credit scoring models were all being applied by individual lenders, and the credit bureau industry was only just started a process of consolidation and automation. Fair Isaac had an entrenched position as a first-player in the credit scoring market, as others struggled to come up with competing capabilities. The term FICO score was already synonymous with credit score, before the age of consolidation and automation of the credit bureau.
The adoption of credit scoring by the major bureau only started late in the mid-1980s. The first in 1984/5 was called ‘PreScore’, which was used for the pre-screening of mailing lists. Another company called MDS developed bankruptcy scores for each of the three bureau in 1987, which gave the new technology. Thereafter, FICO developed delinquency scores for each, Equifax, TransUnion, and TRW in 1989, ‘90, and ’91 respectively. Equifax and TransUnion adopted different names for their scores (Beacon and Empirica) when dealing with contributing subscribers, but consumers still refer to them as FICO scores.
In the wake of World War II there was a lot of effort was spent developing operations research techniques to aid military logistics, largely pioneered by Rand Laboratories, which soon extended into the business arena. One of these was linear programming, which allows optimisation where there is a series of constraints. Given their technical backgrounds, Bill and Earl were quick to recognise its potential application in credit.
Since then, the approach has evolved into something that FICO calls ‘mathematical programming’. While the approach is proprietary and possibly better than anything achieved elsewhere, lenders are able to develop models using FICO’s Model Builder software under licence. NOTE: I am not and have never been employed by them, and this is not a paid advert.