By Jennifer Zeberkiewicz
MoneyMix Contributor 

Yes, Fido is man's best friend but, for us young consumers, our other friend is FICO. Sooner or later you will want a credit card, car loan, or mortgage to fulfill your dreams of independence. And a FICO score helps make these things happen.

Credit unions use FICO scores to evaluate potential risk posed by lending money to someone. A FICO® score is a number based on a statistical analysis of a person's credit report. FICO stands for Fair Isaac and Company. The FICO scoring system was invented in the 1950s by two guys, engineer Bill Fair and mathematician Earl Isaac, who started a consulting business and used statistics to improve business decisions.

According to the Motley Fool, FICO scores range from 300 to 850 but the national median is 723. The higher the better! FICO scores start at zero and accumulate points as your credit history matures.

Not only do lenders use FICO scores, but so do mobile phone companies, insurance companies, employers, and government departments.

credit report versus credit score versus FICO score

You go into your credit union to apply for a new auto loan and the loan officer pulls your credit report and FICO score. Think of the report as a professor's grade book - each individual homework assignment grade and when you turned it in, each test and quiz grade. Think of FICO as your overall report card grade.

FICO scores are based on credit report information in five categories, which are weighted differently: payment history, amounts owed, length of credit history, new credit in the past 12 to 18 months, and the "mix" of credit - revolving (such as credit cards that have no fixed payment or end date) versus installment loans (like car loans that have a fixed payment each month and ends after an established length of time).

You have three FICO scores, one for each of the three credit bureaus - Equifax, Experian, and TransUnion. Equifax calls their FICO score "brand" the BEACON® Score. Barry Paperno, Consumer Operations Manager at Fair Isaac Corporation, said, "Thanks to the advent of business computers, the credit reporting industry consolidated to just three giant credit bureaus by the 1980s. With rare exceptions, Equifax, Experian, and TransUnion compete vigorously with one another. That's why they each give their own brand name to scores that they calculate using Fair Isaac's FICO scoring mode."

FICO scores can vary by credit reporting agency. Paperno said there are two main reasons why scores differ:

• There may be variance in data due to creditors who may not report to all bureaus
• The scoring formula, though very similar, does differ across the bureaus- some risk factors are given different weight by bureau.

Here's where it gets a little complicated: "Not all credit scores are FICO scores," Paperno said. (Those funny TV commercials for freecreditreport.com are not FICO scores and aren't free either.  Most credit bureau scores used in the US are produced by Fair Isaac. "Nine out of 10 major lenders use FICO, it's basically the industry standard," Paperno said.

"In addition to FICO, a variety of other "stability" factors are used in our decision-making process," said Del-One Federal Credit Union's CEO Richard ‘Duke' Strosser. "These factors range from length of residence and employment; to the value of any collateral; to past repayment history and the amount of debt being carried versus their amount of income being earned.  These and many other criteria, combine to determine the amount of risk being taken."

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