With college attendance on the rise nationwide, and with the price of a college education rising just as quickly, many students in need of private loans are being introduced to an important element of their personal record that will follow them into adulthood -- their FICO scores.
What exactly is a FICO score? A FICO score is a statistically derived number representing a person’s creditworthiness. Put another way, the FICO score represents a certain likelihood, the likelihood that a borrower will pay back a loan in a timely manner, or the likelihood that a borrower will default on a loan. Really, a FICO score is equivalent to the level of “risk” a lender takes when he or she (or it) lends money to a borrower. Keeping this in mind, it makes sense that all major lenders -- banks, credit car companies, and others -- decide to thoroughly review a person’s FICO score before lending him or her any money. To a great extent, the FICO score determines who qualifies for which kind of loans, what interest rates borrowers are charged, and what credit limit borrowers receives. A good FICO score makes it possible for a borrower to borrow money under the best conditions, e.g. at lower interest rates, with less collateral. However, a bad FICO score can prevent a borrower from obtaining the loan(s) he or she was most interested in, and in some cases a bad score can deny a borrower from a loan altogether.
The term FICO stands for Fair Isaac Corporation, the company that devised the original credit-scoring model. There are other scoring models available and in use, but the FICO method is by far the most popular. Though the statistical algorithm used to calculate the actual credit scores is a closely guarded secret, Fair Isaac has provided a broad sense of what goes into each score. Five main components are considered: (1) the borrower’s payment history, which includes the punctuality (or lack thereof) of monthly payments. (2) The borrower’s current level of indebtedness, or how much the borrower owes versus how much credit he or she is already allotted. (3) The length of the borrower’s credit history, i.e. how long the borrower has owned and used credit cards. (4) The types of credit that borrower has used in the past -- mortgages, car loans, student loans, etc. (5) The borrower’s use of new credit, or any credit obtained close to the time of the loan he or she is applying for. Other factors can affect the formulation of a credit score, including bankruptcies, judgments, foreclosures. However, potentially biasing factors such as a borrower’s race, religion, gender, or marital status are by law prohibited from entering the equation.
So, we’ve established that having a good FICO score is critical to receiving good loans. But a typical undergraduate and graduate student searching for a good student loan has simply not had the time to develop the five components of the FICO score. As a result, he or she may be unfairly locked out from the best loans that are out there. This is where People Capital steps in. Our innovative peer-to-peer lending platform relies on a model we have called the Human Capital Score, which considers much more than a student’s credit history when producing a student’s risk analysis. The Human Capital Score is data-driven. It incorporates a student’s GPA, standardized test scores, choice of college and major, and other relevant hard data in determining a student’s true creditworthiness.
FICO® is a registered trademark of Fair Isaac Corporation.