Do You Know the Difference Between a Credit Score and a Credit Report?

What is more important, your credit score or your credit report? If you do not know the answer to this question, you are not alone. Credit score issuing companies don’t reveal the formulas they use to calculate credit scores, which in turn leads to confusion among consumers. Here’s what you need to know about credit scores and credit reports – including why they are important to you.

Credit Reports

A credit report is a record of information (detailed below) about you that can be used to ascertain your creditworthiness. For example, when you apply for a line of credit, lenders may request a copy of your credit report from any of the three main consumer credit bureaus, Equifax, Experian and TransUnion. A credit report may also be used for things like pre-employment background checks, insurance applications, even by some utility companies.

Credit reports are composed of the following elements.

Identification Details: Your name, address history, Social Security number, date of birth and employment history are all recorded in your credit report. This information helps to establish your identity and distinguishes you from other individuals.

Credit Accounts: This consists of a list provided by lenders regarding every credit account that you may have opened, be it credit cards, store charge cards, car loans, home mortgages, and so on. Details include the date the account was opened, the size of the line of credit, current balance and payment history.

Credit Inquiries: A credit inquiry occurs every time a lender requests a copy of your report. If a lender requires a copy because you have applied for a loan, it is termed a “hard inquiry.” If the report is required for marketing purposes, it is called a “soft inquiry.” These details are maintained for a period of two years. Lenders may view excessive “hard inquiries” as negative as they can give the impression that you’re borrowing massively – perhaps due to an existing or imminent financial problem.

Public Records and Collections: These are records from state, county, and federal courts, including bankruptcies, foreclosures, liens and judgments.

Credit Scores

A credit score is a numerical value that is calculated by applying a proprietary formula to the information in a person’s credit report. This number, which denotes an individual’s creditworthiness, usually ranges from the 400s to the 800s. Although the formula is generally unknown, an idea about the calculation can be obtained from the popular FICO score, which is comprised of:

• 35% Payment History;
• 30% Amounts Owed;
• 15% Length of Credit History;
• 10% New Credit; and,
• 10% Credit Mix.

More than one credit scoring formula may be used in any one of the credit reports offered by each of the three major consumer credit bureaus, thereby giving rise to various credit scores for the same individual. Credit scores are only used to determine the creditworthiness of applicants for new credit; they are not used directly for pre-employment screenings.

So which of the two is more important?

Credit Scores depend on the data contained in the Credit Report, hence, both are linked with each other. Nevertheless, they are both used for different purposes. The issuers of most kinds of revolving credit, such as credit cards and store charge cards, generally request a copy of the individual’s credit score so that they can quickly determine his or her creditworthiness. On the other hand, for major loans, such as car loans and mortgages, lenders prefer to undergo a lengthy examination of the borrower’s entire credit report. If you’ve ever had a mistake on your credit report while applying for a mortgage, you may have had to submit a letter of explanation with proof of the error – or paid to have a “rapid re-score” to correct the erroneous data. That is because a mortgage lender will scrutinize the details much more so than an auto lender. It is therefore essential for consumers to regularly check their credit report for accuracy, and keeps tabs on their credit score as well.

At Fund&Grow, we have a dedicated and experienced team that can help you get the best credit deals available in the market at the most competitive rates. If you have any issues with your current credit report, we are happy to refer you to an agency that can help you. Contact us at (800) 996-0270, Monday through Friday, 9:30 to 5:30 EST, or anytime via email.