By and large, Americans are doing a better job on their credit scores as a robust U.S. economy continues to roll along.
Yet ask the average U.S. financial consumer the difference between a credit score and a credit report and you may not get an accurate answer.
That’s okay. Consumers may or may not know it, but both a credit score and a credit report are intertwined and, from a logistical point of view, one can’t really exist without the other.
To get a better grip on the similarities and differences, let’s take a look under the hood at credit scores and credit reports, and how you can maximize your experience with each one.
What Is a Credit Score?
A credit score is the numerical ranking of your personal credit health. The two primary credit scoring models – FICO (FICO) - Get Report and Vantage – calculate their credit scores based on a formula on a scoring range from 300 to 850 that takes several personal financial factors into account:
Let’s take them one at a time.
- Payment history (35% of the credit scoring formula) A sterling payment history is the most important factor in calculating a credit score. Thus, paying your bills on time and preferably in full is critical in having a great credit score.
- Amount of debt owed (30%). Creditors want to know the amount of debt a consumer has compared to his or her available credit. Again, paying as much of your debt off as possible each month can lead to a stronger credit score.
- Length of credit history (15%). A consumer’s length of credit history refers to how long they have had credit. That history starts on the day a consumer is first approved for credit, whether for a credit card, car loan, student loans, or other form of credit. The longer your credit history the better. That shows creditors a consumer has ample experience handling credit and debt.
- Credit mix (10%). This refers to the various loans and credit you’ve taken out in your name. Creditors and lenders generally like to see consumers handle multiple forms of debt (i.e., a student loan, credit card, and auto loan, for example.) By and large, the more credit accounts one has that are up to date and being paid off, the better.
- New credit (10%). New credit means any recent credit checks on your credit report, like when a creditor lender processes a credit check before approving credit or a loan. Having multiple credit checks in a short period of time is deemed as a negative by creditors – it tells them the consumer is taking on too much potential debt.
There are ample benefits to having a good credit score. You’ll be approved for more credit, save on interest payments for the credit you do get, and you’re likely doing better financially, with low debt and high savings.
On the downside, it’s fairly easy to ruin your credit score. Late or missed payments, applying for too much credit in a short period of time, and having a high debt-to-credit ratio can all help sink a credit score. Worse, a bankruptcy or repossession can destroy a good credit score.
If you’re in financial peril, it’s advisable to talk to a trusted financial adviser or professional credit counselor. Find a good one at the National Foundation for Credit Counseling.
What Is a Credit Report?
While a credit score is a three-digit glimpse of one’s credit health, a credit report is a more comprehensive view of a consumer’s personal financial standing.
Structurally, a credit report is a summary of a consumer’s financial history, especially in key areas like debt repayment and credit usage. Credit reported are compiled by the three major credit bureaus:
The three credit bureaus track a consumer’s financial reliability and publish it in the form of a credit report.
They obtain that information from creditors like banks, mortgage lenders, credit card companies, and government agencies. In turn, the credit bureaus sell that information to creditors and lenders, who use the data to make credit-issuing decisions.
Credit bureaus include four pieces of specific information on a credit report:
Personal data. A credit report includes the consumer’s name, address, Social Security number, date of birth and employment status. Credit bureau’s call this “personally identifiable information”, or PII. Credit bureaus can update a consumer’s information every time he or she applies for credit.
Credit accounts. A credit report also includes data from each credit account a consumer has opened. Typical credit accounts include a credit card, a mortgage loan, and an auto loan, for example. The credit report will also include the date the account was opened, the account balance, the credit holder’s payment history, and payment status.
Credit inquiries. Any time a consumer applies for credit, that consumer will have the credit inquiry listed on his or her credit report. In general, a credit report will include credit inquiries dating back two years.
Such inquiries are classified as “hard inquires” or “soft inquiries,” depending on the type of credit request. In general, hard inquiries include any specific consumer requests for credit and soft inquiries include any preapproved credit offers based on a consumer’s credit history.
Creditors will only see the hard inquiries and only the consumer will see any soft inquiries on his or her credit report. Note that multiple hard inquiries will lead to a decline in a consumer’s credit score, as it alerts creditors to the fact that the consumer is accumulating more credit accounts – a negative when it comes to credit approval.
Public Record and Collections. Lastly, a credit report will also include any public record data amassed by a consumer that’s listed by state and county courts (bankruptcy is a good example of a public record.) Civil judgments and tax liens no longer appear on credit reports.
The collections section will list any debts that have gone into collection status, which is also widely viewed as a negative by creditors and lenders.
Stay on Top of Your Credit Score and Credit Report
Personal credit reports change on a regular basis and credit scores can move up or down at any time.
Consequently, it’s a good idea to continually track your credit reports from all three major bureaus to be certain that credit report data is accurate and to fix any mistakes you see on your credit report.
Every consumer with a credit score can get a free copy of their credit report annually, from each of the three credit reporting agencies — Equifax, Experian and TransUnion – at AnnualCreditreport.com.
After you receive your credit report, look for any information and activity that you don’t recognize. For example, credit accounts that aren’t familiar and credit cards you don’t recognize should be addressed right away.
If you see any mistakes, incorrect data, or unfamiliar credit accounts, call or email the credit reporting agency where mistakes appeared and have them correct the problem and properly update your credit report.
Once you do that, watch your credit score rise, and see bad information be erased from your credit report – two good outcomes for any financial consumer.