The words “credit report” and “credit score” are frequently thrown around, but what do they actually mean? A credit report is the comprehensive history of all the loans and credit you have had. Your credit score is a three-digit number that is generated using the information in your credit report.
Put simply, your credit report is the history of your loans and credit and whether you paid them back or not. Your credit score is a three-digit number that acts as a quick snapshot of your credit history.
Think back to your elementary school science class. Your credit report would be similar to every test, quiz, and homework assignment you had in the class. Your credit score on the other hand would be similar to your final grade.
Credit Reporting includes all the detailed information that goes into making your credit score, such as your credit card accounts, loan accounts, and other important information. Your credit score is a quick snapshot of this information that lenders can easily use to determine your “creditworthiness”, or how much you can be trusted to pay back your debts.
Credit reports and credit scores are very important aspects of your personal finances and they can determine whether you can have access to important loans and credit cards. However, these two are closely related and it is important to understand their differences. Let’s dive deeper into both of these so we can learn more about their differences!
A credit report is a thorough statement of your entire credit history, which includes every loan, credit card, and any other form of debt that you have taken on. This information is sent by every lender and credit card provider you have had throughout your credit journey. All this information is then collected and compiled by credit bureaus to form your credit report.
If you have a history of successfully making payments on all of your loans and credit cards, this information will be shown on your credit report. When you apply for a loan or a credit card, your lender may want to take an in-depth look at your history of making payments. They will look at your credit report to see just how well you can be trusted to make payments.
If you have a history of missing payments and a history of defaults or bankruptcies, this will also show up on your credit report and your lender will not be convinced that you can be trusted to pay back your debts. Overall, your credit report is very important and can determine whether your applications for loans and credit cards get declined.
Your credit report contains a ton of information, both about you and about your credit as well. Since many different credit bureaus make credit reports, a credit report at one bureau can look different from one at another bureau.
However, credit reports at the various credit bureaus are typically structured the same way. These credit reports tend to be divided into four sections. Let’s look at each of these sections.
The first part of your credit report will contain basic personal information about you. For example, this section will likely include your full name, your date of birth, a history of all your addresses, your phone number(s) and potentially your current and past employers as well. Your social security number may be included in this section as well.
While this information does not factor into your overall creditworthiness as much as other sections, it is still an important section that lenders may look at.
Unfortunately, this information can often be reported incorrectly. If you find that your name, address, phone number, or any of the other information is incorrect, you can contact the specific credit bureau to get this squared away.
This section is arguably the most important section of your credit report. This section contains the majority of the information that your previous lenders sent to the credit bureaus. This information is typically tradelines and other various reports sent to the bureaus.
Tradelines are essentially any loan or line of credit you currently have or have had in the past. The tradelines can include the date your account was opened, the date it was closed, and the type of account it is. Tradelines can also include the current balances on your debts, how large your payments are, and whether your account is in good standing (you have no missing or late payments).
Looking at these reports and tradelines is a good way for lenders to see the debt you are currently paying off and how successfully you are paying it.
If you have any, this third section of your credit report will include any bankruptcy, liens, and other legal happenings you may have had.
As you might expect, potential lenders don’t exactly want to see this section filled to the brim with information. Bankruptcies and other legal proceedings are not a good sign to lenders, as it shows that you have a history of completely failing to pay back your debts and/or getting in trouble with the law with your debts.
For more information on this topic, seek government resources to provide you with the most accurate and up-to-date information on this part of your credit.
Anytime you apply for a loan, credit card, or other forms of debt, your lender will take a look at your credit score and your credit information. Likewise, some employers, landlords, and insurance companies may do this as well. This is to better gauge your trustworthiness as a borrower, worker, tenant, or customer.
Anytime a “pull” on your credit is done by one of these groups, these are called credit inquiries. There are two types of inquiries; hard and soft inquiries. Hard inquiries can drop your score by 5-10 points while soft inquiries don't.
Anytime an inquiry, whether soft or hard, is done on your account, it shows up on your credit report under this section. This section holds less importance than some of the other sections, but is still a way for lenders to see how often you are trying to get loans and credit cards. .
Credit bureaus collect the information from your previous and current lenders to create your credit report. While there are other smaller bureaus, the three main credit bureaus that you and lenders can access your credit reports from are Experian, Equifax, and TransUnion.
Again, these three credit bureaus create their credit reports in slightly different ways. An Experian credit report will look different than a credit report from Equifax or TransUnion. This in turn causes the credit scores to slightly vary from bureau to bureau.
A credit score is a three-digit number created by credit bureaus that is meant to put your overall creditworthiness into a number that can easily be looked at and compared to other borrowers. These credit scores created by the bureaus are created using the information from your credit reports.
While there are a variety of different credit scores, the main credit score is called a FICO credit score. This score is an industry standard, and is used by nearly 90% of all lenders. The FICO credit score ranges from 300-850, with 850 being the best FICO credit score you can achieve.
If you have a history of making payments in full and on time, your credit score should be on the higher end. If you have a history of late p payments, defaults, and possibly even bankruptcies, your credit score will be closer to 300 than 850.
Your credit score is one of the most important parts of your personal finances. Your credit score can determine whether you can get a car loan, personal loan, credit card, and just about any other type of debt. It can also determine how much you are paying for your loan or credit. Borrowers with lower credit scores are typically charged higher interest rates.
Lenders take your credit score into great consideration when deciding to lend to you or not. As such, it is extremely important to have a good credit score. Let’s look at how your FICO score is calculated so you can know what exactly to improve!
Your FICO credit score is calculated using five factors with varying levels of importance. In order of importance, the five factors are your payment history, your credit utilization, the length of your credit history, your credit mix, and your new credit. Let’s briefly look at each of these.
Payment history (35%)
Your payment history on loans, credit cards, and possibly even utility and rent payments make up 35% of your FICO score. Since this is the most important factor, you’ll want to make sure to improve this section to improve your credit score the most.
Credit utilization (30%)
The second most important factor in your FICO Score, at 30%, is how much of your credit limit you’re using. If you’re using $300 of a $1,000 credit limit, your credit utilization ratio is 30%. Any credit utilization ratio under 30% helps your credit score.
Length of credit history (15%)
Creditors want to know the average age of all of your credit accounts, the age of your oldest and newest accounts, and when you last used your accounts. The longer you have had your accounts the better.
Credit Mix (10%)
There are different types of credit such as revolving (credit cards, lines of credit) and installment (mortgage, personal loans); creditors like to see that you’ve demonstrated an ability to manage different types of credit accounts.
New credit (10%)
Every time you open a new credit account, it shows up on your credit report. Opening too many new accounts over a short period may mean that you’re risky.
Now that you know the factors that make up a FICO score, it’s important to realize that your credit profile is unique, and creditors may look at other factors like income and your full credit report before deciding on your credit-related application.
The definition of a “good credit score” is not very black and white. Each lender has their own definition of what a good credit score is. In general, a score in the 660-740 range will often qualify as a “good” credit score. Again, this is an arbitrary range and lenders might be fine with lower credit scores or will want to see better credit scores than this.
Credit reports and credit scores are typically the main determining factors in whether you have access to certain loans and credit cards.
If your credit report and credit score show that you have good habits of paying back your debts, you will have a higher likelihood of getting that next loan or that next credit card. Bad reports and scores on the hand will really hurt your chances.
Your credit report and credit score performance don’t just affect loans and credit, however. Landlords can use these tools to determine whether you are a good tenant that can be trusted to make rent payments. Insurance agencies can use your credit reports and credit scores to determine how much they should charge you for insurance. Employers can use your credit reports and credit scores to decide to let you handle company money or not.
While credit reports and credit scores may seem like just another thing to worry about, their importance should not be underestimated. If you have a bad credit score, you may find yourself struggling to find cash at the time when you need it the most. As such, you should devote lots of time and effort towards improving your credit reports and your credit score. Your future self will thank you!