What Is the Precision Score?
The term “precision score” refers to the former name of the so-called “NextGen Risk Score” developed by the credit scoring company, Fair Isaac Corporation (FICO). It is one of many FICO scores associated with the company, and is widely used by lenders to assess the creditworthiness of potential borrowers.
The credit reporting agency TransUnion (TRU) formerly used the term “Precision Score” to refer to one of the popular credit scores generated using their data. Today, this same measure is referred to by TransUnion as the FICO NextGen Risk Score.
- The precision score was a credit scoring system developed by FICO.
- It has since been rebranded as the NextGen Risk Score.
- In recent years, the three major credit reporting agencies have created their own credit scoring system, known as VantageScore.
How the Precision Score Works
Credit scores play an important role in the financial economy. By helping lenders quickly assess the creditworthiness of a particular borrower, credit scores can help reduce the time and risk associated with extending credit to new applicants. Today, the three major credit report companies are Experian, Equifax (EFX), and TransUnion; while the most popular credit scoring formula is the so-called FICO scores developed by Fair Isaac Corporation.
As with most credit scoring systems, a high score indicated a high level of creditworthiness, and therefore a relatively low risk of default. By contrast, low scores indicated low creditworthiness, serving as warnings for would-be lenders. Credit applicants with low credit scores would either be rejected outright, or else extended credit on less favorable terms, such as with higher interest rates. In other cases, credit would be approved but only if additional assets are pledged as collateral. For these reasons, credit reports, and the scoring formulas used to determine them, are a subject of substantial interest to both borrowers and lenders alike.
Although the specific term “precision score” is no longer used, it is part of a general category of FICO scores that continue to be widespread. While specific scores may vary, FICO scores typically take into account five factors when determining overall creditworthiness. These are the borrower’s history of payments, their current level of indebtedness, the length of time in which they have been a credit customer, the types of credit which they use, and the number of times they have applied for new credit products. In general, the most heavily-weighted factors are the applicant’s history of payments followed by their level of current indebtedness.
Real World Example of the Precision Score
In general, a FICO score above 650 indicates a very high level of creditworthiness, whereas scores below 620 may cause borrowers to be rejected or to be offered less than favorable terms. The precision score, however, was based on a scale of 150 to 950. This scale continues to be used today, under its current branding as the FICO NextGen Risk Score.
Although the methodology used in calculating the FICO NextGen Risk Score is not disclosed, the company claims that its use is associated with lower default rates as compared to the traditional FICO scores.
In recent years, the three major credit reporting firms have created their own credit scoring system, known as the VantageScore. This new score now competes with FICO for both consumer-facing and business-to-business applications.