In part two, we're going to shift our focus to the credit score. So again, the information that is included in your individual credit report is the basis for where they come up with the credit score or the number that you are assigned as a credit score. And in the US, there are two main popular credit scores that are used. The one that is still considered the industry standard or the leader in the industry is the one that is based on the Fair Isaac Corporation algorithm, and that is the FICO Score. Again, this is the most popular credit score in the US, and it is based on the formula or the algorithm that was developed by the Fair Isaac Corporation way back in the 1950's. This formula is a formula that's used by all three credit bureaus to come up with a FICO Score. And as long as the same information is being used by those credit bureaus, they should all be reporting the same FICO score for you. On the FICO Score, the scores themselves are three-digit scores that range from, on the low end, 300 points, all the way up to 850 points. And typically, scores that are above 700 will qualify individual consumers for some of the best terms that are available in terms of any loan contract they're applying for, or any other type of credit account that they are attempting to use. So a higher score in the case of the FICO Score is better. It signals a lower risk borrower, someone who's going to be more reliable, more likely to be able to make their credit or loan payments, whereas lower scores are signals of higher risk borrowers. And again, lower scores could negatively impact some of your credit or loan application decisions. The second major credit scoring method or model that is used in the US is called the VantageScore. And this is something that was developed and introduced through a partnership with the three main credit bureaus back in 2006. So this is a model or a formula that was developed by the credit bureaus, and it is something that they use to create a credit score that is something separate and something different from what the FICO scoring method will give you in terms of a number. Something that's interesting about the VantageScore since it was introduced, they've come up with a number of revisions to the algorithm or the formula itself. So, depending on the type of vantage score that you're looking at, the range for those scores can vary. Initially, when they release the VantageScore model, scores range from 501 to 990. But now, they've standardized that scoring range to be the same as the FICO scores. It's important to understand which version of the VantageScore model is being used when you obtain a VantageScore or if you obtain a VantageScore, because those score ranges can vary. In addition to the number, the VantageScore method also provides a credit letter grade that ranges from an A to an F. So higher scores would receive higher letter grades. Higher scores and letter grades in the A or B range, again, signal lower risk borrowers, would make you eligible for some of the better credit terms, more likely to be accepted in any loan application. And lower credit scores which would be associated with some of the lower end letter grades Cs, Ds, and Fs would be associated with higher risk borrowers, and again, may face rejection decisions in terms of loan application, or maybe poor terms on any credit account that they may be attempting to open. Now, there are a number of factors that go into calculating that credit score, again, all of this is based on information that is included in your credit report. And here, we can see the factors that go into the FICO scoring algorithm or the FICO scoring model. And by far, the type of information that is given the most weight in determining your FICO score is your payment history. You can see here that your payment history is responsible for 35 percent, or is assigned a weight of 35 percent in determining what your FICO score might be. The amount of money that you owe on your existing accounts is the second largest factor. So this would be looking at what is your current balance on your credit cards relative to the credit limit on those accounts, or how much do you owe on your loan contracts relative to what you originally borrowed. Some of the smaller categories or categories associated with less weight in the FICO scoring method are the length of your credit history. So, how long have you been using credit in addition to how responsibly you've been using that credit, how long have you been using that credit, the type of credit that you're using. So, again, going back to the different types of accounts that show up on your credit report, revolving accounts versus installment loans versus mortgage loans. And then finally, they also look at how much credit have you taken on recently. So, the amount of new credit that you may have taken on. Have you opened up a significant number of credit card accounts just over the past few months? Or have you opened those credit card accounts that you have consistently over a longer period of time? Checking your credit score. Again, this information is available to potential lenders and creditors, but it is also a piece of information that is available to every individual consumer. In contrast to your credit report, which is available for free from each one of the bureaus once per year, you will need to pay for your credit score. And there's a number of different options in terms of the amount of information, or how often you would like to receive your credit score. This can be done when you're requesting your free credit report at annualcreditreport.com. You'll have the option of adding your credit score to your credit report for an additional cost. It's also available for purchase at any other time through a variety of online services. The cost for these can vary considerably. A one-time credit score may be as low as $7.95, if you're getting your FICO score with one of your free credit reports. Or if you would like your credit report reported to you regularly on a monthly basis, you could pay much more than that for a monthly service fee to be able to access that credit score on a more regular basis throughout the year. Again, the biggest thing to understand or be aware of when you purchase your credit score is what type of credit score are you buying. We covered the two major types of credit scores used in the US. Again, the FICO is still the leading industry standard in the US. We also talked about the VantageScore. But even among the vantage scoring method or within the vantage scoring method, there are different versions that you may be obtaining depending on who your purchasing that score from. So, the ranges of those things and the interpretations of the FICO Score versus the VantageScore can differ based on the type or the version of the score that you are receiving. In terms of strategies for improving your credit score, probably the best thing that any individual can do is just to use your existing credit accounts regularly and use them responsibly. So, that means making your minimum payments or your regular payments on time, consistently paying off those credit card account balances, consistently paying down the balances on any installment loans or mortgage loans that you have, and to keep account balances low relative to their credit limits. A few things to avoid. Avoid having a large number of inactive accounts. So, opening up a large number of credit card accounts just to have a high credit limit, while not using very many of those credit accounts is often a strategy that will lead to a lower credit score. Another thing to avoid is having a large number of new accounts that you've requested or attempted to open in a very short time period. So, try to stay away from trying to open too many credit accounts or are taking on too many new loan contracts within any given short term horizon. Finally, again, I can't emphasize enough how important it is to regularly monitor your credit report from all three of the credit bureaus. Again, whether that is requesting all three credit reports at one time each year, or whether that's spreading those requests out across the credit bureaus throughout the year. Just make sure that you're regularly monitoring the information and checking out for accuracy. You can report any inaccurate information that shows up in your credit report to those bureaus. They'll be happy to work with you, especially if some of that information is found to be inaccurate. So it's very important to monitor because, again, this information is important. It is what goes into calculating your credit score, and that information is going to be used in terms of making credit and lending decisions for you in the future. And here are some additional resources related to credit reports and credit scores as part of the Borrowing and Credit Module.
