Jargon Watch: Defining FICO

May 29, 2007

FICO actually stands for the Fair Isaac Corporation. This is the standard credit scoring system that was created in 1958. The company was founded by engineer Bill Fair and mathematician Earl Isaac. They started their consulting services and decision management systems in 1956. Today FICO is headquartered in Minneapolis, MN, with revenue of about $800 million dollars. They have about 3,000 employees world wide.

Now that you have the background on FICO, what does it mean to you, the borrower or lender? FICO scores are available to all 3 credit reporting services in the USA and Canada: Equifax, Experian and TransUnion. Lending Club has a partnership with TransUnion.

How does it work? The FICO score (or credit score) is a statistical analysis of a person’s credit files. This can be a number that is typically between 300 and 850. The higher the number you have, the more representative of your creditworthiness.

Why use a credit scoring system? Credit scoring systems are in place to determine the potential risks posed by lending money. Banks and credit cards use this score to determine if the risk in lending money will be rewarded back. Anytime you give someone a loan, there is risk involved. FICO just helps to lessen the risk for both the borrower and the lender. Keep in mind, there are no magic formulas, as people are still people, and we are glad they are.

To use the services of Lending Club, you must currently have a FICO score of at least 640. This qualifies about 75% of potential members. We believe that lowers the risk for all involved.

Other factors taken into account in Lending Club’s pre-qualification and scoring algorithm include a person’s debt-to-income ratio, and that person’s affinities with other users. More on Lending Club’s own scoring system (including our use of FICO score) in a later post.

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