What’s a credit score and a credit report? (Part 1)
You hear the words frequently and you know Credit Scores and Reports are important and can affect many aspects of your lives, but what do the reports and scores mean, and what goes into determining your individual scores?
First, what is a Credit Report?
Just like it sounds, your credit report is a report showing your history of using credit, how much you’ve used, how much is owed, what type of accounts you have, and any financial issues of public record (judgements, bankruptcies, etc.). Your individual Credit Report is the primary tool used to make decisions about loans as well as interest rates on those loans.
What is a Credit Score?
A Credit Score is a number between a low of 300 and a high of 850, and it reflects an individual’s credit-worthiness. It is calculated based on how you have used credit in the past – were accounts paid on time, paid in full, were cards maxed out? Based on those patterns (and more), it predicts how likely you are to make all your payments on time in the future.
What makes up that Credit Score?
There are 3 national credit bureaus – Experian, Equifax and Trans Union. They each have their own formula to create their score, but all of them look at the following:
- Payment history – are there any delinquent payments on the report, and if so, how many and how long.
- Level of debt – how much is owed all together and on each account, in dollars and as a percentage of the total debt?
- How long have you been using credit?
- How many accounts do you have, what types, and does it seem like you’re looking for more?
Why is it important?
In today’s market, credit is reviewed for many reasons including renting an apartment, obtaining insurance, getting utilities, or getting a loan. The higher your score, the greater chance you will be approved and at a better rate. Less risk equals lower rates, and saves you money.
The federal Fair Credit Reporting Act allows individuals to obtain one free credit report every 12 months from each of the nationwide consumer reporting agencies –Experian, Equifax, and TransUnion. You can request all three at the same time or one every four months to monitor any changes throughout the year. It is very easy to do – just go to www.annualcreditreport.com for a Free Annual Credit Report (you can also call 1-877-322-8228). Note that the free copy of your report does not include a credit score; it generally runs $10 – $15 to obtain the score.