At a Glance
Knowing the key differences between a credit score and a credit report is important for understanding your overall financial standing. Your credit score is a numerical representation of your creditworthiness, calculated using the information found on your credit report. Credit reports provide in-depth details about all of the accounts listed under your name, as well as records from lenders and other businesses that have accessed them. They also include public records, such as bankruptcies and court judgments.
Consequently, it is vital to regularly monitor both your credit score and report to identify any signs of fraudulent activity or errors that could be damaging to your financial well-being. Doing so can help you develop a short or long-term plan for improving your credit health.
In this article, you’ll learn:
- What is a credit score?
- How is your credit score calculated?
- What are credit scores used for?
- What is a credit report?
- How does a credit report work?
- What are credit reports used for?
- How to get your credit report?
- Credit score vs credit report: Key differences
- Why are both credit scores and credit reports important?
is considered to be a perfect credit score and though it is hard to achieve, it is not impossible. According to Experian, about 1.3% of consumers have a perfect credit score.
What is a credit score?
A credit score is used by lenders to help determine whether to approve a loan or credit application and, if so, on what terms. A good credit score can help an individual qualify for loans or credit cards with favorable interest rates, while a low credit score can make it difficult to get approved for credit or result in higher interest rates. You have likely heard of some common credit scoring models, like FICO and VantageScore.
How is your credit score calculated?
A credit score is calculated based on several factors that reflect your credit history and current credit profile. The exact calculation method can vary depending on the credit scoring model used, but generally, the following factors are considered:
- Payment history: This includes whether you have made payments on time and any missed or late payments.
- Credit utilization: This refers to the amount of credit you have used relative to the amount of credit available to you. High credit utilization can indicate a higher level of debt and a lower credit score.
- Length of credit history: A longer credit history can indicate stability and a higher credit score.
- Credit mix: This refers to the different types of credit accounts you have, such as credit cards, loans, and mortgages. Having a mix of different types of credit accounts can indicate responsible credit management and a higher credit score.
- New credit: This refers to the number of new credit accounts you have recently opened. Opening several new credit accounts in a short period of time can indicate a higher level of risk and a lower credit score.
The specific weight given to each of these factors can vary, but the overall goal is to predict the likelihood that you will make timely payments on your credit accounts in the future.
Learn more: How is your credit score calculated?
What are credit scores used for?
Credit scores are often considered a tool for applying for loans or credit cards, but this isn’t the only use. Credit scores can be used to affect insurance rates and even decide the terms of service contracts at some utility companies. The most popular use, however, continues to be the approval of applications for loans and other financial products. The higher your credit score the stronger the indication that you have a lower risk of defaulting on a loan or missing payments. Therefore, lenders can use these scores to quickly process which applicants have the highest chance of success in repaying what they borrow.
What is a credit report?
A credit report is a detailed record of your credit history. It includes information about their credit accounts, payment history, outstanding debts, and other credit-related information. Credit bureaus like Equifax, Experian, and TransUnion maintain credit reports.
A credit report typically includes the following information:
- Personal information: This includes your name, address, date of birth, and Social Security number.
- Credit accounts: This includes information about your credit cards, loans, and other forms of credit, including the account balance, payment history, and credit limit.
- Payment history: This includes information about your payments on your credit accounts, including whether payments have been made on time or if there have been any late or missed payments.
- Collection accounts: This includes information about any collection accounts you may have, such as accounts sent to collection agencies due to non-payment.
- Public records: This includes information about any bankruptcy filings, tax liens, or court judgments against you.
How does a credit report work?
A credit report works by collecting and maintaining information about your credit history. This information is then used to generate a credit report and credit score, which reflect your creditworthiness.
First, information about your credit history is collected by the credit bureaus. This information is obtained from various sources, including credit card issuers, lenders, and other financial institutions. The credit bureaus use the information they have collected to create a credit report, which includes detailed information about your credit history, such as your payment history, credit accounts, outstanding debts, and other credit-related information. They also use the information in the credit report to calculate your credit score.
The credit report and credit score are made available to lenders and other financial institutions that request it when evaluating loan or credit applications. The bureaus regularly update the information in your credit report based on new information received from credit issuers and other sources.
What are credit reports used for?
Credit reports are used for a variety of purposes, including:
- Loan approvals: Lenders use credit reports to determine your creditworthiness when considering loan or credit card applications. A high credit score can increase the chances of getting approved for a loan or credit card and help secure better terms, such as a lower interest rate.
- Setting interest rates: A credit score, which is based on information in a credit report, can also affect the interest rate offered on a loan or credit card. Individuals with higher credit scores may be offered lower interest rates, while those with lower credit scores may be offered higher interest rates.
- Renting an apartment: Landlords may use credit reports to evaluate a potential tenant’s ability to make timely rental payments.
- Insurance premiums: Some insurance companies use credit scores to help determine the cost of insurance premiums.
- Employment screening: In some cases, employers may use credit scores as part of a background check when making hiring decisions.
- Monitoring credit: Individuals can also use their credit reports to monitor their own credit history and check for errors or inaccuracies.
How to get your credit report?
You can get a free copy of your credit report from each of the three major credit bureaus, Equifax, Experian, and TransUnion, once a year. Here’s how to get your credit report:
- Visit the official website of Annual Credit Report. This is the only website authorized by the Federal Trade Commission to provide free credit reports.
- Provide your personal information, including your name, address, Social Security number, and date of birth, to verify your identity.
- Select the credit bureaus from which you want to receive your credit report. You can choose to receive reports from one, two, or all three bureaus.
- Review your credit report for accuracy and completeness. Look for any errors or inaccuracies, such as incorrect personal information, accounts that don’t belong to you, or incorrect payment history information.
- If you find any errors or inaccuracies, dispute them with the credit bureau by following the steps provided on their website or by contacting them directly.
In addition to getting a free credit report once a year from each of the three major credit bureaus, you can also purchase your credit report from the credit bureaus or a credit monitoring service.
Related: Reading a credit report
Credit score vs credit report: Key differences
Why are both credit scores and credit reports important?
Credit scores and credit reports are very important in the modern financial world. Credit scores, calculated based on factors like payment history and existing debt, serve as indicators of your creditworthiness and represent a crucial determinant when it comes to securing credit offerings like loans, mortgages, and even some lines of employment.
Credit reports, which compile all the information available about your activities related to handling financial products like these, are also greatly important since they provide an expansive breakdown detailing what lenders would be assessing before granting any involvement in capital resources. Having access to both of these tools can lend great insight into both how to build and maintain a healthy credit profile going forward.
No, requesting your own credit report will not hurt your credit score. In fact, regularly checking your credit report can help you monitor your credit history and detect any errors or inaccuracies that could be affecting your credit score.
When you request your own credit report, it is considered a “soft inquiry” and does not impact your credit score. Soft inquiries are different from “hard inquiries,” which are made by lenders or other organizations when you apply for a loan, credit card, or other financial product. Hard inquiries can have a small, temporary impact on your credit score, but they typically decrease over time and have a minimal effect in the long term.
Lenders typically look at both a credit score and a credit report when evaluating loan and credit card applications. While a credit score provides a quick summary of your creditworthiness, lenders will also look at the credit report to get a more complete picture of the individual’s financial situation. Both the credit score and credit report are important factors in determining your creditworthiness and your ability to repay debt.
It’s difficult to say which is more important, as they both play a crucial role in determining your creditworthiness and financial stability. While a high credit score is important in determining your creditworthiness, the information in the credit report provides the context and details needed to make an informed lending decision.