Credit Score vs. Credit Report
A credit report is a breakdown of your past and present credit accounts, as well as how you’ve managed them.
A credit score is a numerical representation of your creditworthiness based on the information in your credit report.
Credit Report
There are three major credit bureaus in the U.S.: Equifax, Experian, and TransUnion. Each agency compiles your information into its own credit report.
Credit reports may be referenced by lenders, credit card companies, potential employers, landlords, utility companies, phone service providers, and other companies. The information in your credit reports help them decide whether or not to approve you for a loan, credit card, line of credit, financial product, or service based on how well you’ve handled previous credit accounts. Once you’ve been approved, the information on your credit reports also help companies determine what your rates and terms will be.
What is included in your credit report?
Your credit report includes information broken down into several categories, including: personal information, credit account history, public records and collections, and inquiries.
Personal information
This is information about you, including your name, address, Social Security number, date of birth, other names used to refer to you (a maiden name, for example), and employment information.
Credit account history
Here you’ll find all open accounts that you’ve had in the past seven years, as well as any closed accounts within that same time period. Each account includes such information as the lender’s name, your current balance or loan amount, payment information, credit limits, interest rates, and the date that you opened or closed the account.
Public records and collections
Public records include any information that could be found on you publicly, such as bankruptcy filings or court judgments against you for missed child support payments. This information is public knowledge and can impact your credit scores in a negative way if it’s very recent or indicates that you have bad money management skills.
In this section, you can also find any outstanding debts that have been sent to collections.
Inquiries
When you apply for a new credit account, the lender can request a copy of your credit report to get a sense of how you’ve handled credit in the past. This request can either be a soft inquiry or hard inquiry, depending on the company that is requesting. Both get added to your credit report, but only hard inquiries cause your credit scores to drop. Too many inquiries within a short time period can hurt your score.
You can also inquire about a copy of your own credit reports periodically to confirm that your information is correct and up-to-date.
How to check your credit reports
Under the Fair Credit Reporting Act, consumers in the U.S. have legal access to one free credit report per year from each of the three major bureaus. You can request your credit reports at AnnualCreditReport.com.
When ordering a free copy of your credit reports, you should review your credit reports all at once to compare the information. This will allow you to find any discrepancies between agencies and ensure your credit scores are accurate.
How to fix errors on your credit report
If you find errors on your credit reports, it’s important that you dispute credit report information with both the lender or company that reported the information and the appropriate credit bureau right away. Unfortunately, some errors may not be fixable, but there are a few steps you can take to maximize the chances that you will get it fixed.
Contact the credit bureau directly with your concerns. You will need to let them know if there is inaccurate or incomplete information in your credit file, why you think it’s wrong, and proof of the information in question. For instance, if your credit report shows that you have several delinquent payments on a credit card, you will need proof that you made these payments on time.
If you don’t have proof, then it’s best to contact the creditor that reported this information to the credit bureau and ask them for assistance with your claim.
Credit Score
When calculating your credit scores, credit scoring agencies use the information in your credit reports from three notable reporting companies: Equifax, Experian, and TransUnion.
Your credit scores are especially valuable to financial institutions and other lenders when they are deciding whether or not to approve you for a loan, credit card, or other financial assistance.
There are many different scoring models, but FICO is the most popular. FICO scores range from 300–850 and are used by about 90% of financial institutions and lenders to determine your competence with finances. In general, higher credit scores indicate that you are more trustworthy with credit from lenders.
What affects your credit score?
For the FICO scoring system, there are five things that factor into your credit score: payment history, credit utilization, credit history length, credit mix, and new credit.
Payment history
Accounts for 35% of your credit score
Your payment history indicates how reliable are you with paying bills and debts by their due dates. If you pay your bills on time or early, it will positively impact your credit score.
If you miss credit card payments and your credit card issuers report missed payments to the credit bureaus, you will receive a negative mark on your credit report, which will cause your score to go down.
Credit utilization
Accounts for 30% of your credit score
Your credit utilization is the percentage of your total credit that is in use at any given time. Popular credit scoring agencies recommend that you keep your utilization ratio below 30%. That means for a card with a credit limit of $1,000, your maximum credit card balance should only ever be about $300.
The closer that you are able to keep this ratio, the more positively it will impact your score.
Credit history length
Accounts for 15% of your credit score
How long you’ve had credit plays a role in your credit score. The longer that someone has been building their credit portfolio, the more the consumer’s credit history length will positively impact their score.
It not only matters how long you’ve had available credit but also how active you’ve been on those accounts. For instance, if you opened a new credit card account 20 years ago but haven’t used the card in a decade, this will not exactly boost your credit scores. Financial institutions and lenders want to see that you’re using and repaying your credit; if you’re not using it at all, they cannot accurately assess your creditworthiness.
Credit mix
Accounts for 10% of your credit score
Your credit mix is all of the different types of credit accounts in your portfolio. Examples of accounts include: mortgage, car loan, student loans, personal loans, credit cards, and other lines of credit. The more diverse your portfolio is, the more positively your credit mix will impact your credit score.
New credit
Accounts for 10% of your credit score
New credit is how much credit has been opened or attempted to be opened recently. New credit can cause your score to dip slightly. Things that qualify as new credit include: opening a new credit card, taking out a loan, or hard inquiries made by financial institutions or lenders before making a lending decision, even if your application is not accepted.
What doesn’t affect your credit score?
Only credit-related information, predominantly found on your credit report, is used to calculate a credit score. Your score excludes personal information, such as:
- Age
- Race
- Income
- Address
- Ethnicity
- Disabilities
- Employment
- Marital status
- Religious or political affiliations
Why Your Credit Report and Credit Score Are Important
While your credit report and credit score are not the end all be all, they do play a significant role in the financial opportunities available to you. The higher your score, the better deals you will get. The lower that your credit scores are, the more likely you will miss out on loan opportunities or get stuck with sky-high interest rates.
Better interest rates and terms
With a good credit score, you automatically have access to top-tier APRs, credit limits, and low-to-no-cost fees on credit cards, lines of credit, loans, and other types of credit. Lenders will compete hard for your business, which you can use to your advantage when negotiating better terms.
You can ask your lender or insurer to re-run your credit check so that you can get better rates and terms if you improve your credit score after your initial policy agreement. The company can continue using your original, lower score if you don’t flag it, which could end up costing you a lot of money in the long run.
Higher likelihood of loan approval
Interest aside, your credit scores help determine whether you secure a loan at all. This goes for mortgage lenders and lenders of auto loans, personal loans, student loans, and other types of loans. With a low score, you can be considered too big of a credit risk to a lender, and they may disqualify you as a loan candidate altogether. With a higher score, you can be pre-approved for a loan without having to go through the process of shopping around.
Access to better credit cards with lower fees
Similar to lenders, credit card issuers may pre-approve you for a credit card with competitive rates and terms to entice you to become a customer. You should be careful not to jump at every opportunity, as this is an easy way to rack up credit card debt; however, having credit card offers at your fingertips can work in your favor if you’re looking to build your credit or spread your balances across multiple cards.
With better terms come fewer fees — or no fees at all. Credit card companies know that fees are an instant turn-off, so customers with good credit scores are offered lower balance transfer fees, no annual fees, and other perks.
Lower insurance premiums
Lenders and credit card companies aren’t the only ones who pay attention to your credit score — insurers have a vested interest as well. When signing up for insurance, the company will take a close look at your credit score to determine how reliable you are with payments and managing your accounts.
In fact, insurers use credit-based insurance scores to predict how likely a customer is to have an insurance loss. Customers with higher scores reap the benefits, as they’re rewarded with lower monthly insurance payments to reflect their good behavior with credit.
Stronger candidate for rentals, jobs, and more
Future employers, leasing agents, utility companies, and phone providers — they also want to know that you have a positive record with credit before bringing you on as an employee or customer. Not only will you have more options for where you can rent, work, and become a customer, different companies can reward you with lower or waived security deposits, better monthly payments, and new products or services at no additional cost.
