A credit report is a detailed snapshot of your financial life, showing both how you manage your credit and pay your debts. And information in your credit report is used to determine your three-digit credit score. Here’s how both affect your financial health.
While they are not the same thing, one generally would not exist without the other. However, that is not always the case. Let’s dive in and see what we can discover.
What is a credit report?
Your credit reports are generated by three credit bureaus – Equifax, Experian and TransUnion. These reports are a detailed snapshot of your financial life, showing both how you manage your credit and pay your debts. Most of the information on your credit reports come from your lenders, not you.
What is a credit score?
Credit scores are three-digit ratings typically generated using information directly from your credit reports. Your credit score crunches the credit report data using complex algorithms that generate a numerical value, or grade if you will, from that information.
The biggest player in this arena is the FICO score, but it’s not the only one. VantageScore has made significant strides in becoming an important player in the scoring world.
Two new products – Experian Boost and UltraFICO – allow consumers to supply information used in addition to data supplied by lenders to generate a score. Scores typically run between 300 and 850. About three quarters of American consumers have a FICO score above 650. A score of 670 to the mid 700’s is considered a good credit score. The difference can translate to better interest rates and terms for credit.
See related: Why is a credit score important?
How else do scores and reports differ?
Think of it this way – your credit report is a factual inventory of your use of credit. Your credit score uses those historical facts to predict the future as it applies to paying your bills and whether or not you will pay your next loan as agreed.
Another difference is that consumers are entitled by law to free copies of their credit reports from each of the three bureaus annually. Credit scores, on the other hand, are not required to be free, but are required to be offered at a reasonable cost by the FACT Act.
Scores, as we have already said, are simply the result of the report. However, there are several ways to get free scores.
How does your credit report affect your credit score?
Credit scores are based on several factors, which can be gleaned from the credit reports.
For instance, FICO lists five factors and has established the percentage each factor is worth. Payment history is first at 35%; your credit report will reflect this by listing those accounts that are paid as agreed. This notation helps your score.
Your credit report will also show late payments, which will hurt your score. This is why making your payments on time and as agreed is so important.
FICO also looks at credit utilization (counting for 30% of your total score), which shows how much available credit each account has. This is calculated two ways: individually by account and as an aggregate of all accounts. Some sites recommend keeping your credit utilization below 30%, but try to keep your maximum percentage for each below 25%. Those consumers with the very best scores are generally in the single digits in this area.
The remaining 35% breaks down like this: length of credit history (15%), new credit (10%) and credit mix (10%).
- Length of credit history differs from payment history because it looks at how long a consumer has had at least one account that has been reported to the credit bureaus. This is the only factor over which the consumer has little control. Your accounts can only be as old as they are.
- New credit inquiries occur when you apply for credit. Preapproved credit offers don’t count against you unless you take advantage of one of those and apply for a card.
- Credit mix means the types of accounts you have. Credit falls into two major categories, revolving and installment. Credit cards are revolving, while car payments and mortgage payments fall under the installment type. The scoring formulas like to see a “mix” here of both types of accounts. That’s why a fistful of credit cards will probably not get you the best scores if that’s all you’ve got.
The VantageScore model looks at basically the same information, but it differs from FICO in the importance it lends to each factor. While payment history is most important to FICO, VantageScore considers it “moderately influential.” Your utilization ratios and your credit mix are more important in the VantageScore model.
But what if you have little or no reported payment history? Yes, you can still get a score! You can use Experian Boost to get your utility payments factored into your credit score, and your landlord can report your positive rent payment data to the credit bureaus using various services.
How to check your credit report
You can get one free credit report from each of the three bureaus each year at AnnualCreditReport.com. One of the best ways to take advantage of this benefit is to spread the reports out over the year, getting one report every four months.
You can also get all three at once, which can be helpful if you are planning to apply for a large amount of credit (like a mortgage) within the next six months or so. Having them all that far in advance allows you the time to correct errors and see where your problem areas are.
Through April 2021, the three bureaus are offering free credit reports weekly, at the website above, so consumers can monitor their reports and protect their financial wellbeing and credit during the COVID-19 pandemic.
How to check your credit score
You can purchase your credit score from one of the bureaus when you get your report or directly from FICO. Many credit card companies and banks also offer both free credit scores to their customers.
While scores available to consumers may not exactly match what a lender might get, it should be close. There are multiple versions of each major score in use. Even as improvements are made to the scoring algorithms the older ones may still be in use as it costs a lender to upgrade. VantageScore is up to 4.0 and FICO has just announced 10 and 10T.
It’s important to know what is in your credit reports and to have a general idea of your scores. If you are in the market for a large purchase requiring financing, it becomes crucial if you want to have some certainty of being approved at the rate you desire. Knowledge is power, as they say.
Remember to keep track of your score!