The FICO score is a credit model that is based on giving a certain score to a consumer. To that end, it evaluates the applicant’s ability to assume credit based on their characteristics and history.
That is, the FICO score is a method of evaluation or credit score that allows an analysis prior to the granting of a credit or loan. To do this, it takes into account the situation of the recipient or potential debtor and their previous credit experience.
In that sense, the FICO score is considered an important element of decision-making in terms of capital loans.
This system is followed by all types of entities, highlighting those of a banking or credit nature.
It is one of the most used modalities in the field of investments. Thus, it is a standardized instrument extended to multiple contexts around the world.
Origin of FICO Score
This valuation method was presented in 1989 and its name responds to the acronym of Fair, Isaac and Company.
Originally, it was quickly consolidated as a pioneering model as an evaluator or qualifier element using historical data from lending agents as the root.
Thus, since its creation it has been intensively used in banking procedures such as the granting of mortgage loans, personal loans or credit cards.
Likewise, it has occupied an important place in the framework of the financing of companies, which resort to resources offered by financial entities.
FICO Score Features
The FICO score has a series of characteristic elements to review:
- scoring range: This method ranges from 300 points to 850 depending on the assessment made. In some cases it may reach 900 points.
- Adaptability: Through a questionnaire, it is possible to measure the credit risk of all types of individuals or organizations.
- Registry base. Grant or concession decisions are made following records. These reflect historical series of credits and loans.
- Distinctive element. The FICO is also used as a signaling model for individuals or companies. It allows signaling its level of intrinsic risk.
It is important to note that there is no single convenience in conducting FICO studies. That is, each company subjectively evaluates and establishes a certain score.
The development of these tests is, therefore, susceptible to changes or adaptations by each entity that launches them within its evaluation work.
Variables of influence in the FICO score
Compared to other credit evaluation models, the FICO score is designed through the following relevant variables:
- Payment history: Assess past ability to pay to date. It represents 35% of the final score.
- Use of credit: Measures the use made of the credit received. This variable has a weight of 30%.
- Length of credit history: If the debtor is a regular recipient of credit financing, the percentage will increase. It represents 15% of the note.
- New credits: This variable is aimed at evaluating the concentration or assumption of various debts. In this case it would be 10%.
- Types of credit used. Try to evaluate the debtor’s experience when dealing with debts of different natures and credit risks. Add up to 10% of the final grade.
After the detailed evaluation of each case or debtor file, the sum of the variables explained will result in the percentage or final result. In that sense, the higher the final score, the greater the capacity to assume the new credit.