In this part of the lesson, we're going to drill down into both credit reports and credit scores, and I'll show you in particular how credit scores are actually derived from credit reports. So let's start off with the credit report. Your credit report is a detailed record of your credit history. And it specifically focuses on your ability to repay any money you may borrow. So what you may ask is in your credit report? Well first, it includes personal data like your current and previous addresses. Your social security or national identification number. And your employment history. Second, your credit report includes your credit history and particularly seeks to identify the number and type of accounts you have past due versus in good standing. Third, your latest credit report will document past credit inquiries into your credit report. So, what's that all about? Well it's done as a means of gauging both your borrowing activity, and your possible solvency. The big statistic here is that, at least according to one credible source, people who have added six or more inquiries into their reports during the past year, can be up to eight times more likely to file for bankruptcy than those with credit reports showing no inquiries at all. Finally, the report provides important details of any of your accounts that may have been turned over to a collections agency. And note that these details include any information about lawsuits or claims on your property, or the garnishing or taking of your wages as a result of some type of lawsuit or other action. In other words, if you have been late on your credit cards or run into trouble with the law for failure to pay your debts or stuff like child support for your kids, your credit report is going to reveal it. But such oblations are not really the most important function of the credit report. So what is? Enter stage left, your credit score. Your credit score is hands down one of the most important numerical measurements of you as a financial entity. And it is a number based first and foremost off a very detailed statistical analysis of your credit report data. And depending on the credit bureau calculating the credit score, they may use other information too. Now, here's some good stuff to know. The standard range of credit scores is between 300 and 850. And this should be intuitive, the higher your score, the less risk lenders will see you as having when it comes to defaulting on your debts. So a higher credit score will mean both lower interest rates for borrowing, and often, better loan terms. As a practical matter, most banks and lenders consider anything above about 750 to be excellent, and scores of 800 and above to be credit perfection. So what are the details of this score and what does it actually measure? Well the most well known credit score and industry standard is the FICO score. This FICO score is actually named after its inventor, the Fair-Isaac Corporation. In fact, Fair-Isaac is the king of credit scores in the marketplace. As for the specific function of the FICO score, its statistical goal is to predict the likelihood of a borrower going 90 days past due or worse, in the 24 months after the score has been calculated. Now, besides Fair-Isaac, there are three other main credit bureaus that produce FICO-like scores using their own proprietary models. These bureaus include Equifax, Experian, and Transunion. As to why your credit score may differ across these bureaus, most of that is due to the slightly different weighted schemes each use in their proprietary models. Now, here's a key point. In America, each citizen is entitled to one free credit report each year from each of the big three credit bureaus. And here's a key tip. To get your free credit report, you can go to the website AnnualCreditReport.com. This is a website run collectively by Equifax, Experian, and TransUnion. And note here that if you also want to get your credit score, along with your credit report, there will be a small fee, which is one of the obvious reasons these credit bureaus sponsor that website. As for how credit reports are laid out, they will vary considerably, because the different credit bureaus do indeed have different practices. That said, there are significant commonalities. For example, most reports will include a short summary of any problem areas they notice on your case. A sample tag line here might read, proportion of balances compared to the credit limit too high. In addition to such caution flags, your credit report will also contains specific payment data from the lines of credit you have. We'll also put red flags on things like any months where you paid late or not enough. Now, here's a really important head's up. The credit report companies are far from perfect, and they will sometimes make errors. Unfortunately, it will be your responsibility to correct those errors. Typically, this means filing some type of protest form, requesting an investigation and asking that the error be corrected. Here, bureaus have 45 days to look into the matter and address the mistake. Now here's still another important heads-up. You are entitled to a free credit report within 60 days after a poor credit decision. Such a decision might include being denied credit. Alternatively, the lender might be trying to saddle you with an above-market interest rate based on your alleged higher credit risk. In such cases, lenders can't just blow you off. Instead these lenders, or creditors are legally required to tell you exactly why they are offering you substandard terms. In this process, they must identify the specific items that negatively affected your application. So that way when you go over your credit report to double check it, you will know exactly what to look for. You can see then, how your credit report and your credit score are critical parts of your financial life. What we need to do next is to dig more deeper into the credit score number itself. The goal here will be to show you ways that this stage in your life to strategical build and boost your credit score. So down the road when you wanna buy that car or house, or borrow for a new business venture, your loan will get approved at the lowest possible rate and with the best possible terms. Not a bad goal to strive for. So let's get on it in part three of this lesson when you're ready. [MUSIC]
