In 1956, Bill Fair and Earl Isaac created a company to measure consumer credit risk. It came to be known as The Fair Isaac Corporation and was shortened to FICO. They created a measure of a three digit score (from 300 to 850) to rate your financial performance in debt management. It measures your credit-worthiness and estimates your level of future credit risk using predictive analytics based on data recorded in your credit history. It aides lenders in assessing the risk you pose when you ask for loans or credit.

The FICO score affects you as a consumer because it is used as the standard measurement for extending other credits such as renting an apartment, buying a car, purchasing a home mortgage, or getting additional credit cards, and so forth. In order for you to apply and get approved for a new line of credit, a credit card, or any loan, the lender uses your credit score to make sure you qualify for the loan and to calculate your interest rate, annual fees, and down payments you will be required to abide by to get your loan. The higher your score, the better your options will be in negotiating the terms of your loans.

FICO has become the standard to the point that many employers will seek that prospective employee's consent to having their credit scores checked prior to offering employment, especially in positions that involve handling or managing money.

It is important for you to familiarize yourself with various terms used in discussing credit-worthiness, and fully understand which factors are used to calculate the FICO score. Here are the five (5) factors used in reporting services:

Payment history - Your payment over time (on time versus late)
Account mix - What types of credit you have (revolving versus installment)
Credit age - How long you have had credit (years versus months)
Credit inquiries - Open credit applications (zero versus many)
Credit utilization - Capacity (how much you owe versus how much you originally borrowed)

Most commonly used terms in evaluating and discussing credits:

- Credit history
  - A chronological document of your financial transactions over time
- Credit report
  - A document issued by credit reporting agencies to state your financial reputation
- Credit score
  - The FICO is the most used score and is made of a three digit number between 300 and 850
  - The average number is between 600-800 and the higher your score, the better!
- Credit reporting agencies (CRAs)
  - Agencies who keep history of financial information and documentation on all credit consumers, issue reports, and calculate FICO scores

For successful understanding and building the FICO score, you can follow five steps listed below. Let's get started!

Chapter 1. What do Credit Reporting Agencies do?

Chapter 2. Crossroad of what makes the FICO Credit Score

Chapter 3. Which financial actions hurt my FICO Credit Score?

Chapter 4. What does not affect my FICO Credit Score?

Chapter 5. How do I protect, improve, or repair my FICO Credit Score?

Test your knowledge!

This was made possible in partnership with The Singleton Foundation for Financial Literacy and Entrepreneurship. This video and more videos like this can be found on Millionstories.com.