There are 3 major credit reporting agencies in the US, Experian, Equifax and Transunion, and each of these use the information they have in a persons credit report
to generate several FICO scores for each person. A FICO score, founded by the Fair Isaac Corporation, is basically an algorithm that calculates a score, that is a number
between 300 and 850 that is based on the information in a person’s credit reports. And, there isn’t just 1 algorithm that is used to generate a fico score, in fact, there
are many different FICO scores, or algorithms, that are commonly used between the 3 agencies, which can be broken down into 2 major categories, base FICO scores
and industry specific FICO scores. Base scores are designed on any credit obligation, a mortgage, credit card, auto loan or other type of credit. Industry specific scores
are designed about a specific type of credit, such as an auto loan or credit cards. For both base and specific scores, there are different versions of how the score is
calculated. For instance, FICO score 2, 3, 4, 5, 8, and 9, which is the most recent, are examples of base scores. And for industry specific scores there is auto score 2, 4, 5,
8, and 9. And for credit cards there is bankcard 2, 4, 5 and 8. These are just some of the different types of FICO scores, and keep in mind that all of these have slightly
different algorithms. For instance, it has been reported that the FICO score 8 model is more critical of high balances on revolving credit lines, such as credit cards,
and FICO 2, 4, and 5 models put less emphasis on the percentage of the total credit a person is using. And, all of these types of FICO scores can be slightly different
for all 3 of the major agencies, as they each may have slightly different information about you in their credit reports. So, the base FICO score 9 may be different
for Experian, Equifax and TransUnion. As an example, if you go for a mortgage, the lender may get your base FICO score 2 from Experian, your base FICO score 5
from Equifax and your base FICO score 4 from TransUnion. If all 3 of these scores are the same, that makes the loan decision simple, if 2 of the scores are the same,
then they will use that score to base the loan on, and if all 3 scores are different, they typically will use the middle score for the loan decision. If you are going for a loan with
a spouse or partner, then the middle score for each person is used, and typically the lowest of those 2 scores is used. And having a good credit score can save you major
cash. For instance, a score of 760 plus, may get a 30 year fixed mortgage rate of 2.356%, a score of 660 to 679 may get you a rate of 2.969%.
So over the life of the loan for $250,000, your good credit would save you about $29,160. FICO scores are based on 5 different categories, 35% on payment history,
30% on amounts owed, 15% on length of credit history, 10% on new credit, and 10% on credit mix. Each of these 5 categories are not equal with their importance,
as we see here in these percentages. Payment history is based on if you have paid past credit accounts on time, amounts owed is based on several factors,
including credit utilization, or the percentage of available credit you are using in relation to the credit limit you have. For instance if you have a credit card
with a $10,000 max, and you have a $1000 balance on it, then you are using 10% of that available credit. Length of credit history is based on how long your credit
accounts have been established, for instance, a 7 year old credit card account is typically better than a 1 year old credit card account. New credit is based
on if you have opened several new credit lines recently, or if you have had several recent inquiries on your credit report. New credit can be beneficial sometimes,
if it diversifies the types of credit accounts you have. Credit mix is based on what was just mentioned, the diversity of the types of credit you have, for instance, mortgage,
auto loan, credit cards, gas cards or student loans. While the formulas that are used to generate a FICO score are held in extreme secrecy, I did find this chart in
a white paper about credit scores. This chart shows 1 variable used in each of the categories and how points are given based on a person’s attributes for that variable.
It's reported that up to 20 variables are used across these 5 categories. So, to keep things simple, there could be 4 different variables for each of the 5 categories.
As an example, let’s say that Sally here has these 5 attributes for each of the variables listed in the chart. She doesn’t have any serious delinquencies in her credit report,
so she would score 75 points from that variable. She has a 22% balance on her credit cards, so based on this chart, she would score 45 points. Her number of months in file
are 8 years, so, she scores 75 points there, she has 1 inquiry in the last 6 months, so, 60 points there, and she has 2 bankcard trade lines, so 55 points there.
This gives her a total of 310 points from these 5 variables. If a lender was using a FICO score that did have 20 variables, one way this score could be calculated
is by using her scores from the other 15 variables, adding them in and this would generate her credit score, and here is a completely made up example
of what that might look like. Hopefully this chart and example gives you a better perspective of how credit scores are calculated. And to give you a little more
perspective, the average credit score in the US rose to 711 in 2020, and here is a graph showing the average credit score since 2010. And some companies may want to
see your credit report as part of the hiring process, as they feel that credit reports can help determine how responsible a person is, especially if the job requires
handling of money or is a financial role. They don’t get to see your actual credit score, but they do get to mostly see what potential lenders see, such as your outstanding
balances, missed payments and open lines of credit. These do not go marked as recent inquiries on your credit report, and they must have your written consent
before pulling your credit history. The biggest takeaways I can give you from doing research on this video are to number 1, make sure you pay your creditors on time,
as that has the biggest impact on your credit scores. Number 2, keep the balances due on your credit cards at a low percentage, but use your credit cards.
If you never use them, there is no data and that is not a good thing. Number 3, older credit cards accounts seem to be beneficial, and if possible, try not to open
too many new accounts over a short period of time. And number 4, credit diversity seems to be a good thing. And that be the basics on credit scores.
Alright my friends, hopefully this video helped you out, if not, if you feel this video is an absolute and utter piece of garbage, one thing you gotta do, don't forget, help me out,
and Boom. Pound that thumbs down and give me some immediate punishment for wasting your precious time. If however you feel this video was maybe average,
or maybe even slightly above average, well in that case, I do have more videos right there for you, till next time, I am outta here.