Credit can be very confusing. Americans can be granted or denied a loan and have very little understanding why. In addition, you have to make a special request to view your own credit report, and it can be dozens of pages long and almost appear to be written in a different language. What can be even more confusing is the difference between your credit report and your credit score.
Let’s take a look at these two important terms, find out what they have in common, and what the difference is.
Your Credit Report
If you were considering giving a loan to someone you’ve never met, then you’d probably want to know what his or her reputation is. Have they ever borrowed money before? Did they pay it back? Your credit report is simply your recent history as it relates to borrowing money.
A credit report contains four different sections. The first section contains identifying information including your name, address, Social Security number, birthdate, and employment information. It’s important to include this data to ensure that you are not confused with someone else who has a similar name.
The next section contains a list of your credit accounts. Each lender that you’ve had an account with will report the type of account and the date it was opened. Each account listed will also contain other information such as your credit limit, its current balance, and your payment history.
The third section will include credit inquiries, which is any time that you’ve authorized a lender to obtain a copy of your credit report. However, this section only contains information on your last two years of credit history. It’s also important to note that some inquiries related to marketing, or viewing your own score, have no effect on your creditworthiness.
Finally, there’s a section on your public record and collections. This includes information on debts that are in state and county courts, as well as overdue debts as reported by collection agencies. Public records can include bankruptcies, foreclosures, suits, wage attachments, liens and judgments.
There are three major consumer credit bureaus that compile credit reports, Experian, Equifax, and TransUnion. By law, you are entitled to receive a copy of your credit report each year through AnnualCreditReport.com.
What is a Credit Score?
Credit reports can be lengthy, difficult to read, and interpret. The credit industry has developed formulas to condense this information based on the previous statement. Your credit score is a single number designed to represent your creditworthiness. The higher the number, the more likely you are to repay a loan.
Credit scoring companies create formulas to convert your credit report into your credit score, which is typically between 350 and 850. Two of the major credit scoring companies are FICO and VantageScore. These companies could create a credit score based on the information that’s contained in any one of your credit reports. In addition, credit scoring companies offer lenders different credit formulas that are designed to be used for different reasons. Finally, these formulas are continuously revised and updated. Therefore, a formula used several years ago will produce a different result than today’s formula.
In general, your credit score will be composed of five different factors. The most important factor is your payment history, which can make up over a third of your credit score. Next, is your level of debt, which is nearly as important. Much less of a factor is your length of credit history, the amount of new credit you’ve applied for, and the mix of different types of credit in your credit history.
What Should You Do About Your Credit Report and Credit Score?
First, everyone should take the opportunity to order and view their credit reports once a year. It’s free and easy to do, and it lets you see what lenders will see when you apply for a loan. In the past, you used to have to pay for an expensive credit monitoring service in order to view your credit score. Now, many credit card issuers are offering free credit scores to all of their customers, and Capital One and Discover offer scores to anyone, even if you don’t have an account with them.
By monitoring your credit score, you can watch it improve while taking quick action when there’s a problem. By understanding the difference between credit reports and credit scores, you can take some of the mystery out of your credit and make the best decisions for your future.
Learn more about your score by answering a few simple questions and get your free credit score courtesy of CreditSoup.
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