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Do you know Fair Isaac? The Fair Isaac Company is the creator of the FICO score: that little three-digit number that governs your ability to get a good rate on your credit card, mortgage loan, or car loan. It affects your car insurance, home insurance and even your ability to get a job. how can that be?
The Fair Isaac Company was founded in 1956 to provide data to businesses to help them make better decisions. Fannie Mae and Freddie Mac gave FICO scores a significant credibility boost in 1995 when they recommended that lenders use FICO scores to qualify mortgage loan applicants. Imagine you have no idea why your loan was declined, except that something called the FICO score wasn’t high enough. It wasn’t until recently that the Fair Isaac company was willing to share the key categories it uses to calculate your score. The exact formula used to calculate your credit score is still a closely guarded secret. However, thanks to Internet lenders who published some FICO guidelines in the early 2000s in response to public outcry over privacy, Congress eventually made it a law that people should have access to their scores.
More than 65% of lenders now use the FICO score to ensure that they will be able to get back the money lent. If there is even the slightest chance that you will be late or default on your loan, those lenders will raise your interest rates or even deny you a loan. In the next series of articles, I’ll cover five factors that affect your credit score: payment history, outstanding balance, length of credit history, new credit, and types of credit.
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