It was in the 1950s that financial institutions came together and thought that it was necessary that a uniform method to value the creditworthiness of borrowers was necessary. A few leading banks commissioned the Fair Isaac Co. (FICO) to develop a set of scales and equations which can be used to determine how much of a credit risk a person is. The results are extrapolated into a commonly understood number that is now called the credit score. This score is used for us to determine who has bad credit or not.

The equations and scales developed are quite complex. If you really want to know how to derive the credit score the equations and scales are available to download although it really isn't worth the time to compute the results yourself. Computers can be used now to ask a series of questions about your bank details and billing details which can be outputted into a credit score.

The whole premise of the FICO score is to take all your previous financial information and credit history to predict your future performance with the loan. If you have a high credit score then it is more likely that you will follow the requirements of the loan as you have previously so you are less of a credit risk and will be rewarded with a cheaper loan. Naturally if you have previously been poor with your financials you will have a low credit score and thus have to pay more for a loan as you are a higher credit risk.

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