Not long ago, an interesting headline was making its way around the major news outlets: Ben Bernanke was having difficulty refinancing his mortgage. While the exact reasons were not widely disclosed, the story shed light on an issue that has perplexed me for a while now: is the credit system in the U.S. fair? Does it even make sense?
First, let’s look at how the FICO system came about. Bill Fair and Earl Isaac, who developed computer systems and software that predict outcome, founded the Fair Isaac Corporation in 1956. Today, the company still tightly controls the technology that weighs various factors found in a person’s credit report.
Fair Isaac licenses its technology to credit reporting agencies, who then use that software and add their own programs and statistical data to produce customized credit scores. The result is a three-digit number ranging from 300 to 850, also known as a FICO score. The FICO score is supposed to grade risk, letting a lender know the statistical chances of getting repaid.
