If you don’t understand the difference between your credit report and your credit score, you are not alone. Many people do not realize that credit reports and credit scores are two entirely different things.
Your credit score, as well as the data found on your credit report, are the determining factors when it comes to a lot of major life decisions. These two factors determine your eligibility for things like a mortgage, credit card, personal loan, or other credit product.
Knowing the relationship between the two, how to access both, and how to improve both are important factors in maintaining your financial health.
How Your Credit Report and Credit Score Work Together
Your credit report and your credit score are different, albeit related. A credit report is a collection of information about your credit history, loan paying history, and the current status of your credit accounts. A credit score is calculated based on the data found in your credit report.
Think of your credit score like a photograph. It’s a single moment captured in one image. Your credit score is basically a snapshot of your creditworthiness. In this scenario, your credit report is more like a video. It provides much more information and context when compared to a photograph.
These two factors are important when you are applying for a loan or line of credit. If you were to apply for pre-approval for a loan, the lender will typically ask you for your credit score. If your score is high enough and the lender decides to pursue approval for your loan, they will ask you to sign a release for your credit report.
Oftentimes your credit score can get you a foot in the door with a lot of lenders. It’s a quick snapshot that gives the lender an idea of your financial situation. Once they approve you for the next step in the process, your credit report can provide them with a wider view of your finances to make an informed decision.
Understanding the Differences
It’s clear that your credit report and credit score work together in several ways. However, there are a few key differences that are important to note.
They Have Contrasting Purposes
Your credit report’s purpose is to provide a detailed collection of information to yourself or lenders. Oftentimes people will request their credit reports to help them repair their credit or improve their credit score. Lenders will also request your credit report if they want to see a detailed breakdown of your financial history.
In contrast, your credit score’s purpose is only to provide a numerical grade that summarizes your credit report. Many lenders, especially large credit card companies, do not care to see your full credit report. Instead, they go off of your credit score to determine your eligibility.
They Contain Different Information
Credit reports can contain quite a bit of information. This information includes your financial history with credit cards, loans, and other forms of credit. It also contains identifying information, credit inquiries, and public records.
Your credit score does not have anywhere near the amount of information that your credit report has. Instead, it is only a three-digit number that illustrates your creditworthiness. Other than general information like your name and birthdate, your credit score is only a numerical grade.
How Your Credit Report Works
Your credit report begins when you get your first loan or credit account. For many people, this is their first car or their first credit card. The report then accumulates your financial data for the rest of your life.
Your credit report is more than one report; it is three reports from three different agencies. TransUnion, Equifax, and Experian are the three main credit reporting agencies in the United States. The three credit reports are often very similar but may contain more or less information depending on what is reported to them.
Lenders can opt to report your information to any, all, or none of the agencies which is why there may be differing reports on your creditworthiness.
Your Right to Fair Reporting
Because your credit report is the basis for your credit score, all the information on the report must be correct. The U.S. government passed the Fair Credit Reporting Act (FCRA) in 2003. One aspect of this act was to allow you to request your credit report from each bureau free of charge once every 12 months. This allows you to verify all information to ensure it is correct.
The credit bureaus are not in charge of putting the information together and they are not responsible for any missing or incorrect information. The lender, financial institute, or other reporting company supplies the data. If you find errors in your report, it is up to you to contact the reporting agency to have it corrected or removed.
How to Get a Copy of Your Credit Reports
Everyone should request their credit reports annually as part of their financial health checkup. It is free to everyone. You can request your credit reports at AnnualCreditReport.com. Don’t fall for other websites that offer free credit reports, only AnnualCreditReport.com is completely free and backed by the credit bureaus.
At the site, you provide some basic information, and then each bureau requests differing identifying information. Once your identity is verified, your credit report will be provided for you to view or print. It is a good idea to save the file so that you can refer back to it as needed.
Each credit bureau and many private companies also offer credit monitoring services. Credit monitoring alerts you when there are inquiries or changes made to your credit report. Monitoring not only lets you see when your credit score goes up or down, but can also be vital in detecting identity theft. When a new credit account is opened, the monitoring company sends you an alert. You can potentially save thousands of dollars using a credit monitoring company.
Reviewing and Understanding Your Credit Report
The first time you see your credit report can be intimidating. Depending on how long you have had credit, the report could be many pages. It is broken down into various sections that should be thoroughly reviewed to ensure its accuracy.
Here are four main sections that you will see on each report:
1. Personal Information
This section, sometimes referred to as the identifying section, contains your Social Security Number, birth date, name, and other personal information. The first thing you should check is the spelling of your name.
Oftentimes there will be more than one name listed due to entities making spelling errors or if you have used a nickname or maiden name in the past. Check all addresses and phone numbers for accuracy. Employment data may or may not be listed as it is up to the employer to report that to the bureaus.
2. Account Information
This section may also be called a credit history. Here you will find all credit accounts associated with your Social Security Number. Before the listing, you will also find notes on how it is arranged and coded so that you can interpret the data.
This section will sometimes be separated into satisfactory and unsatisfactory sections. The name, address, and phone number of each entity will be listed as well as the type of account, age of the account, payment history, original loan or credit amount and current balance. The bureau may or may not rate the account, such as OK, Good, Excellent, or Poor.
These are requests for your credit report or score. The report will break these into regular inquiries, promotional inquiries, and account review inquiries.
Regular inquiries are those that you or someone on your behalf instigated. Too many of these can hurt your credit score. These stay on your report for two years. Promotional and account review inquiries do not affect your credit. These companies either offered you credit through mail or email or reviewed your credit file for their credit assessment or employment reasons.
4. Supplemental Information
Lastly, there may be supplemental information included such as how to contact the bureau to dispute information in the report as well as consumer rights information.
How Your Credit Score Works
Your credit score, often referred to as your FICO score, is a three-digit number based on the complex information in the credit report. The score can fall anywhere between 350 and 850, with 850 being a perfect credit score. Oddly enough, your FICO score is not included in your credit report.
When you first begin your venture into the world of credit, you don’t have a credit score because you don’t have any credit being reported to the three bureaus. It takes about six months of having a loan or credit card for a credit score to appear.
Because your credit score affects your ability to get approval for loans, get better rates on insurance, rent an apartment and so much more, it’s vital to understand how your credit score is affected by your financial decisions.
Five Factors That Influence Your Credit Score
To better understand how your credit score is calculated, here are the five factors that make up your total score.
1. Payment History
Your history of payments is the most important factor in your credit score, accounting for 35% of the final number. Paying your credit accounts and loans on time, every month shows responsibility. New lenders do not see you as high risk when you have an excellent payment history.
2. Length of Credit History
The duration of each credit account is considered when computing your overall credit score. Accounts that you have had for long periods of time increase your credit score. The duration of your credit accounts makes up about 15% of your overall score.
Image source: CreditLawCenter.com. Data source: myFico.com.
3. Amount of Debt
Your amount of debt (or your credit utilization) is simply how much of your available credit is being used. Credit utilization refers only to revolving credit, such as credit cards. Utilization accounts for 30% of your credit score. Keeping this number low can increase your credit score.
4. Credit Mix
Your credit history is a combination of installment loans and revolving credit. Installment loans are loans that have an end date and are for a set amount, such as your home loan, car loan, or other large purchase.
Revolving loans or credit have a limit on how much you can spend and you pay back a predetermined percentage each month to free that amount for spending again. Department store cards and credit cards are revolving credit. The ratio of the mix in your credit report accounts for 10% of your credit score.
5. New Credit
New credit accounts, revolving, and installment, as well as hard inquiries, make up the remaining 10% of your credit score. Hard inquiries are requests for your credit report from potential lenders such as applying for a credit card. Too many hard inquiries can harm your credit score. Seeking multiple loans or credit cards is seen as risky behavior.
Tips for Improving Your Credit Score
The first step to improving your credit score is monitoring your score. If you don’t want to pay for a credit monitoring service, many credit card companies, such as CapitalOne, provide a free FICO update with their monthly statement. If you notice your score dropping, you can then follow up with the bureaus to determine why and take steps to correct it.
As previously mentioned, lenders use your credit score to determine your eligibility for a loan or line of credit. Here are a few tips on how you can boost your credit score:
Tip #1: Pay off Balances
You can definitely see an increase in your credit score if you pay your credit cards down and keep your credit utilization low. Don’t max out your credit cards just because the credit is available.
Tip #2: Be on Time
Pay all of your bills on time. Many utility companies, cell service providers, and even medical service providers are now being reported to the bureaus. Paying on time keeps your score from going down.
Tip #3: Get a Secured Credit Card
If your credit score is low due to simply not having had very much credit, apply for a secured credit card. The credit card company gives you a credit card with a limit based on the amount of your initial deposit.
As you use the card and make payments, your payment history will be reported to the three credit bureaus. Over time, the card may become unsecured once the credit card company sees a demonstration of responsible use.
Tip #4: Don’t Credit Shop
This is the practice of applying for multiple credit cards or loans in hopes that one will say yes. You are simply hurting your credit score with the hard inquiries. If a company wants to pull your credit report for any reason, ask why and if it is a hard pull or a promotional pull. Opt-out of any hard pulls unless necessary.
Now that you understand the difference between your credit score and your credit report, it is easy to see how the two are closely related. Your score is dependent on your report, making both factors extremely important to your financial health.
If you want to maintain a good credit score or increase your score, it may be worthwhile to enroll in a credit monitoring service. You can also review your credit report annually to ensure that there aren’t any errors that would hinder your progress. The more effort you put into the state of your credit report and credit score, the better off you will be when applying for a loan or line of credit.