I hear a lot of people interchanging the term credit report with credit score.
I do it myself.
But there’s a big difference between the two. Let me show you…
Differences Between a Credit Report and a Credit Score
Credit Report
Your credit report is really a snapshot of your credit use history. It shows potential lenders:
- your personal information (name, address, social security number,
- what kinds of credit you use (credit cards, mortgages, loans)
- how long the credit line has been open
- whether you have paid your bills on time (including any collection information if a debt had to be passed on to a collection agency)
- how much of the credit you have used and what is outstanding
- whether you have been looking to open new sources of credit (any credit inquiries that have been made)
- banking information
- public records (such as bankruptcy or a court-related judgment).
Lenders, such as credit card agencies, look at your report to determine if they should extend you credit (like a credit card). Basically, your credit report gives a lender a view of whether you pay your debts back or not.
By law, everyone is allowed free access once every 12 months to their credit report from each of the three national credit reporting agencies (Equifax, Experian, and TransUnion). You can order a free credit report check from AnnualCreditReport.com. (Watch out for other companies that say they can give you a free credit report but they are really trying to sign you up for a service or get you to buy something else.)
You should check your credit report yearly to make sure all of the reported information is correct and that there are no fraudulent accounts that have been open in your name.
Though lenders use your report to determine if they should extend credit to you, the report won’t tell you what you can expect as an interest rate from the lender. That leads us to…
Credit Score
Credit scores use the data in your credit report and assign a number (usually ranging from 300-900) which shows lenders how much of a risk you are in paying back a debt.
The higher your score the less of a risk you are (that’s why a high score is important in getting a good finance rate).
The most common score used is the FICO score calculated by Fair Isaac Corporation. There is one FICO score for each of the three reporting agencies. The agencies may also have their own version of a credit score but FICO is the most widely used.
Here is a breakdown of how your credit score is calculated:
Your credit score could be used for credit card applications, auto loans, mortgages, insurance, and by potential employers. Insurance and employers? Yup. Insurers treat a high score as being more responsible and can get you better rates (if you have a good score make sure to mention it to your auto insurer). Employers use the score in the same way. They look at your score as a measure of how responsible you may be with your work.
You should check your credit score if you plan to make a big purchase that would require financing such as buying a car or a house. Try out this calculator from myFICO to see how different scores will affect your financing. (By the way, I used myFICO to purchase my three credit scores before we bought our mini-van as well as before we bought our house. By checking my scores I knew I would be able to qualify for a low interest rate).
Monitoring your credit score is also a great way to make sure there us nothing happening on your account that could potentially hurt your credit score. Checking your credit score allows you to see what areas may need improvement. You never know when you might need credit.
There are a number places that will monitor your score and give you a credit score for free. Some are completely free while others offer free trials.
To Recap:
Credit Report – shows credit history. Check it yearly to make sure the information is correct
Credit Score – a number that indicates your credit risk; what a lender will use to determine your interest rate on your financing. Check it to gauge what kind of financing you can expect from a lender.
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What kinds of credit you use (credit cards, mortgages, loans).
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Good point FFB!
I’d also point out that you don’t have to get your free credit report from each bureau at the same time. In fact, if you stagger them (1 every 4 months) then you are effectively performing your own credit monitoring program – for free.
Good point Joe! Though if you had a big purchase coming up I’d make sure to check them together to make sure there are no errors that could affect a loan. Great tip!
Funny you should mention that FFB. My wife and I just purchased our second house, and I did pull my credit report from all 3 bureaus as part of the pre-financing stage. I wanted to make sure I knew everything was clean before shopping for a lender. I learned my lesson from the last time we purchased a house – I had a bankruptcy on my credit report! It was erroneous, and quickly removed (thankfully). I think it really helped to expedite the process when I pointed out that on the date of the bankruptcy, I was a sophomore in high school.
There you go! Wow, spending so much as a HS sophomore..haha.
So true. Most people really want their score to see what kind of rates they will get. A report without a score is next to worthless.
And, what if I don’t have any debts when applying for a loan? Do they have to recalculate my credit score? I think in that case the chart above should be rearranged, but what will take place of freed up 30% chunk for “Amounts owed”?
@ Wawanesa – Not having any debt would help your score I would think so long as you have had a credit history. Your debt to credit ratio would be smaller which is a good thing. If you’ve never had credit before then that’s a different story as there’s nothing for them to really report on.
So if you are planning to take a loan, you must know two things. You need to have some idea about the credit score range, and your current credit score. The credit score range will give you an idea where you stand, when you compare your own score with it.
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