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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About the Author
Jay Fran enjoys freelance writing, especially in the area of personal finance. Jay is also a publisher at motorcycle-financing-guide.com, a website that makes it easy for consumers to make an informed decision when applying for a motorcycle loan, Atv loan, Snowmobile loan or personal watercraft loan
