As a consumer, you are probably aware of credit reports and credit scores. But do you really know what they mean and how they interact? And most importantly—How do they affect you?
Credit Report vs. Credit Score
Credit reports and credit scores are related but not interchangeable. Your credit report includes your payment history for roughly the past decade and includes credit card transactions, loan history, liens, and bankruptcies. Credit scores, which can range from 300 to 850, are calculated by data companies using the information in your credit report to determine your eligibility for a loan, along with the parameters of the loan, such as the interest rate and credit limits.
What affects my credit score?
Different companies calculate your credit score in different ways. The current rate on your loan will depend on your financial activities. Every credit score consists of five components: payment history, amount of debt, credit history, new credit, and types of credit used, with payment history and the amount of current debt having the most impact. Your credit score will increase or decrease depending on activities. A higher score will result from punctual bill payment, lower debt totals, fewer credit card accounts, and demonstrating fiscal responsibility. Because credit reports and credit scores are based on behavior over the past 10 years, the effects of negative activity will decrease over time.
What is a FICO score?
The Fair Isaac Corporation (FICO) introduced FICO scores 30 years ago to provide an industry standard for scoring creditworthiness that would be fair to both lenders and consumers. While there are many companies that provide credit ratings, FICO scores are used by 90% of top lenders and help millions of people get the credit they need for a new home, a new car, or an education. A good FICO score can save you thousands of dollars in interest and fees.
What constitutes a good credit score?
In general, scores above 670 indicate good credit. The higher your score, the lower the risk and the more likely creditors are to lend to you. The general score ranges that help lenders make fair and accurate decisions are:
800+ Exceptional
740-799 Very Good
670-739 Good
580-669 Fair
<580 Poor
Why check your credit report?
Your credit report will not provide you with a credit score, but you can monitor your credit report for factors that will contribute to your score. Don’t focus just on your score. Your report shows information on the number of credit cards and loans you have; whether you pay your bills on time; and any debts that have been turned over to a collection agency. Know your credit report—because creditors, insurers, some employers, and other businesses can use it to decide if they want to work with you.
Check your report for inquiries, amount of credit, payment history, etc. If the findings on your report are good, it should reflect a good credit score. Be aware of inquiries or credit lines that you did not originate. These could indicate identity theft or fraudulent activity. Accounts or bankruptcies that aren’t yours can hurt your credit, increase your fees to borrow money, and even eliminate your chance of getting a loan or a job. The sooner you spot a mistake, the sooner you can dispute it.
How can you check your credit reports and credit scores?
You can request one free credit report weekly from each of the three main credit agencies—Equifax, Experian and TransUnion, at AnnualCreditReport.com. In addition, nonprofit organizations that offer credit counseling services may now share credit scores with their clients. Always work with reliable credit agencies, organizations and financial institutions to prevent instances of fraud.
