If you’ve ever applied for a credit card or personal loan, the bank most likely used a computerized credit score to determine your likelihood of paying it back. And there’s a very good chance that the lender used one number in particular: the FICO score.

Few companies have as much effect on our financial wellbeing as FICO (FICO), although the organization itself exists in relative obscurity. Previously known as Fair Isaac Corporation, it was founded in 1956 to help businesses better predict customer behavior. That meant developing methods that could make sense of vast amounts of data. It grew into a business with a March 2015 market cap of $2.67 billion

Today, FICO makes money by providing software solutions for a broad range of purposes, such as combating fraud and making operations more efficient. However, it’s best known for the innovative scoring system it first made available to credit bureaus back in 1981. 

San Jose-based FICO is no longer the only scoring software on the market. Most notably, the three major credit reporting agencies – TransUnion, Experian and Equifax – have teamed up to develop their own tool, known as VantageScore, to compete with it.

However, FICO is still considered the gold standard for evaluating creditworthiness. According to the firm’s website, 90% of the top U.S. lending institutions use its scores, and 95% of financial institutions in the U.S. are FICO clients.  Mortgage lenders, for example, rely on its proprietary tool for about three-quarters of all loans. 

How It Works

At some point, you’ve probably wondered how a company like FICO comes up with the scores that have such a big impact on lending decisions. It’s all based on algorithms, computer-based formulas that assign specific weights to various pieces of information in your credit report. Based on the results, each individual is assigned a number between 300 and 850.

Your “base” FICO score has five main components: 

  • Payment history (35%)
  • Amounts owed (30%)
  • Length of credit history (15%)
  • Presence of new accounts (10%)
  • Types of credit used (10%)

It’s important to realize that a single consumer may literally have dozens of slightly different FICO scores. There are a few factors that can cause this divergence. For instance, the data in one credit bureau’s report may vary slightly from that of the other two agencies, resulting in three separate scores.

Individual lenders also have developed proprietary algorithms that can produce different outcomes from the same credit report information. An auto lender, for instance, may use a different set of criteria than, say, a credit card issuer. 

Finding Your Score

These days, one of the ways that FICO makes money is by selling its scores directly to consumers as part of a credit monitoring service. Its most popular bundle gives you credit reports from all three agencies – along with a current FICO number for each one – for $24.95 a month. 

The company also sells its scores to lenders, which use them as a key factor in their lending choices. It used to be that banks would try their best to keep these scores hidden from applicants. However, within the past couple years, the Consumer Financial Protection Bureau has urged financial institutions to become more transparent. Now, numerous institutions, including Citigroup and Discover, are making FICO scores available to credit card users at no additional cost. 

FICO has embraced this “open access” trend, which helps solidify its hold on the market. However, the credit bureaus, which try to sell both credit reports and credit scores to consumers, are less enthused. Of the three, only Experian offers the actual FICO number; the others use their own, privately labeled scoring system. 

There’s another way to get a complimentary score, even if your lender doesn’t offer it to you. As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, borrowers are entitled to their credit rating if they’re rejected for a loan or fail to get the best possible rate. For more, see Pros And Cons Of Credit Monitoring Services.

The Bottom Line

FICO isn’t the only software tool for determining credit scores, but it’s still the choice of the vast majority of lenders. You can always pay for your score from FICO or Experian, but thankfully a growing number of lenders are giving it away for free. See Top Websites For Checking Your Credit Scores, Top Places To Get A Free Credit Score Or Report and FICO or FAKO? The Limitations of Free Credit Scores.