Definition
Risk scoring models are complicated formulas that measure creditworthiness of individuals based on an individual’s credit history.
Analysis
The first major risk scoring model for rating creditworthiness was created by Bill Fair and Earl Isaac and became known as a FICO score after the company they founded, Fair Isaac and Company. This company was renamed Fair Isaac Corporation in 2003.
Various risk scoring models have been created by Fair Isaac, and even the major credit bureaus have developed their own formulas. The accuracy of scoring models is constantly debated, and their formulas are updated frequently to more accurately predict risk. Ultimately though, even a perfect risk scoring model will generate an inaccurate score if the credit histories that scores measure are inaccurate.
Risk scoring models are what generates the credit scores that consumers and lenders rely on to establish and expand credit markets. These objective measures of creditworthiness allow for consumers to receive credit accounts at terms that appropriately compensate for potential risk of default.
