A consumer credit rating assesses the credit worthiness of an individual.  Credit ratings are calculated from financial history and current assets and liabilities.  Typically, a credit rating tells a lender or investor the probability of the subject being able to pay back a loan.  However, in recent years, credit ratings have also been used to adjust insurance premiums, determine employment eligibility, and establish the amount of a utility or leasing deposit.¹

A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to higher interest rates, or the refusal of a loan by the creditor.

In the United States, an individual's credit history is compiled and maintained by credit bureaus.  Credit worthiness is usually determined through a statistical analysis of the available credit data.  A common form of this analysis is a 3-digit credit score provided by independent financial service companies such as the FICO credit score. (The term, a registered trademark, comes from Fair Isaac Corporation, which pioneered the credit rating concept in the late 1950s.

An individual's credit score, along with his or her credit report, affects his or her ability to borrow money through financial institutions and credit facilities.

The factors which may influence a person's credit rating are:

• Ability to pay a loan (Income, assets, and current liabilities)
• Current / historical interest paid and relative rates
• Amount of credit used (Debt to available credit ratios)
• Amount of Debt
• Saving patterns
• Spending patterns

FICO is the most popular scoring model used among lenders and creditors to calculate a consumer’s credit risk. This mathematical equation evaluates many types of information from a consumer’s credit report from a particular credit bureau. By comparing this information to the patterns found in thousands of past credit reports, scoring estimates the level of risk a lender or creditor is assuming.²

Each of the national credit bureaus utilizes the FICO algorithm to provide credit scores. Fair Isaac Corporation continually upgrades its scoring models in order to provide the sharpest credit evaluation possible. The NextGen (next generation) credit score offers the latest innovations in credit risk analysis.

Fair Issac and others have recently begun working with their algorithms to try to better determine the likelihood of consumers repaying specific kinds of obligations, say a car loan as opposed to paying rent.  One attempt has been to create a specific medical credit score so providers can better predict the likely of a medical bill being repaid.

¹ http://en.wikipedia.org/wiki/Credit_rating

² http://www.credco.com/creditreports/understandingscores.asp

To come up with the classic FICO credit score, Fair Isaac uses 22 pieces of data collected from the three major credit bureaus (Equifax (EFX ), Experian (GUS ), and TransUnion) to calculate a credit score -- 300 is the lowest, 850 the highest. The final number is a composite that comes from individual ratings in five categories: payment history (35% of the rating); length of credit history (15%); new credit (10%); types of credit used (10%); and debt (30%). Income is not a factor. "A person can have a very high income and never pay their bills," said Craig Watts, public affairs manager for Fair Isaac.

Fair Isaac calculates a FICO score based on the data provided by each of the three credit bureaus. It's not uncommon to see up to a 50-point differential between ratings. The reason: Bureaus collect data at different times of the month, or one bureau may have inaccurate information.

Fair Issac Corp., developer of the FICO credit score, has partnered with a new Massachusetts start-up,  Healthcare Analytics, in developing what has been called MedFICO.    They are working with Tenet Healthcare Corp, one of the nation's largest for-profit hospital chains.  Healthcare Analytics CEO is Stephen Farber, who resigned as chief financial officer of Tenet in 2004.

From the Healthcare Analytics, Inc. Website:  (HAI) works with hospitals and physicians nationwide to help improve their financial relationships with patients.  HAI combines industry-wide data on individual patient payments, including co-pays and deductibles, with exclusive access to Fair Isaac’s proven analytic technology to set new standards in post-care patient relations.

The NexGen FICO risk score is an off shoot of the Classic FICO credit score aimed at reducing the risk of lenders while also allowing them to increase their approval rate. The NextGen FICO looks at far more predictive variables than the Classic FICO credit score thus allowing it to be more accurate. The NextGen FICO is currently being widely adopted by lenders and is becoming increasingly popular in retail. NextGen FICO credit score, may be also be referred to the PinnacleSM, FICO® Risk Score or Advanced Risk Score.¹

According to Fair Issac², NextGen FICO risk scores rank-order consumers according to their likelihood to repay a credit obligation as agreed. An alternative to the established industry-standard classic FICO risk scores, NextGen scores deliver the accurate broad-based consumer credit risk assessment available. Credit grantors can lower bad rates between 10% and 25%, or increase approval rates up to 5% or more by using NextGen in place of classic FICO credit bureau risk scores.

Fair Isaac NextGen FICO risk scores have the following names:

• PinnacleSM score at Equifax
• FICO® Risk Score, NextGen at TransUnion
• Experian/Fair Isaac Advanced Risk Score at Experian

² http://www.fairisaac.com/fic/en/product-service/product-index/nextgen-fico-score/

Credit scoring can be used to screen patients based on prior credit history.  This approach gives banks a crude instrument to assess likelihood repayment.  Consumer advocates express concerns since credit scores are an eligibility factor and that bad scores may result in barriers to good credit arrangements.

• Smoothing the Vicissitudes
• Consumer ratings impact a consumer’s ability to establish lines of credit.  Without a line of credit, consumers have a difficult time financing large purchases like a home. With a positive consumer rating, consumers are more likely to have fair credit agreements and spend less money on the actual “borrowing” of the money.