Prior to Fair Isaac developing the credit scores, most lenders
use to actually manually examine each applicants credit report
and credit history to determine whether or not to extend credit.
This manual process was highly time consuming and sometimes
resulted in large human errors.
The credit scoring formula was developed to help lenders make
better judgments more quickly thus allowing them to service
customers better. In general, the credit scoring formula looks
at lots of variables such as mortgage debt, credit card debt,
total debt to income ratio, other types of debt, number of late
payments and various other variables.
One thing most people looking for a loan fail to realize is that
depending on the type of loan you are applying for, the lender
may use a different version of the FICO credit score. Lenders
use various versions of the Fair Isaac FICO scores to better
manage their risk. Since certain loans have different risks to a
lender, using a different FICO score formulas allows lenders to
measure the risk that is most appropriate for the loan being
applied for. For instance, a motorcycle loan may have different
risk than a mortgage loan to a lender, thus the lender would use
a different FICO score formula. The goal of this article is to
provide an understanding of the different types of credit scores
you may see when applying for credit.
Classic FICO®
In the past, the Classic FICO credit score has traditionally
been one of the most commonly used credit scores by most
lenders. Each year billions of lending decisions are being
measured using the Fair Isaac Classic FICO score. If you are
looking for a mortgage loan, car loan, online motorcycle loan, credit card loan or
other consumer loans it is likely that the lender will use a
Classic FICO credit score. Sometimes the credit reporting
agencies refer to the Classic FICO credit score by different
names. Here are some common names used: Beacon®, FICO Risk
Score®, or Empirica® .
Industry Specific FICO Score
As the name suggests an industry specific FICO credit score will
be used by lenders who see specific risk in different industries
which they do business. For instance, motorcycle loans may have
a different risk than car loans. Therefore, a lender may use an
industry specific FICO Score to measure risk differently among
the two different types of loans. Many times industry specific
scores are an off shoot of the Classic FICO score, but they will
normally measure different variables and have predictive
weighting on certain variables that are specific to the
industry. You may see industry specific credit scores for auto,
bankcard, finance and installment products.
NexGen FICO® Risk Score
The new kid on the block is the NexGen FICO Risk Score. The
NexGen FICO risk score is a newer version of the Classic FICO
credit score which was developed to make the Classic FICO credit
score foundation more predictive. The goal of the NexGen is to
reduce the risk of lenders while also permitting them to
increase their approval rate. The methodology is based on the
foundation that the better a lender can manage risk the better
approval rates they will have since they will experience less
losses. This is the goal of the NextGen score. The NextGen FICO
looks at far more predictive variables than the Classic FICO
credit score thus allowing it to be more accurate. Today, the
NextGen FICO is increasingly popular by lenders especially in
the retail marketplace. Sometimes you will hear the NextGen FICO
credit score referred to the PinnacleSM, FICO® Risk Score or
Advanced Risk Score.
CallScoreTM
A CallScore is designed to keep records and measure the
probability of consumers to repay their credit and not default.
The CallScore is used primarily in the UK. As defined by Fair
Isaac® "CallScore leverages CallCredit's database of UK consumer
credit profiles and demographic information, in combination with
Fair Isaac's predictive analytic expertise, to assess each
consumer's relative likelihood of default."
Overall, consumers should understand that the credit score which
are bought from the credit reporting agencies may differ from
the credit scores lenders are using to decide the terms of their
loan request. The above credit score types provide consumers an
overview of which type of credit scores they may face when
applying for credit.
Copyright (c) 2005, by Jay Fran This article may be freely
distributed as long as the copyright, author's information and
the below active live link is published with the article.
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