Your credit score and credit report are two different things. Both play an important role in your ability to secure a line of credit, and they work together to portray your creditworthiness. Nevertheless, you may be wondering which one is more important, your credit score or your credit report? Let’s compare the two markers and how they impact your lending options.
What Is a Credit Report?
A credit report is a file detailing your credit history. It provides an overview of your payment patterns, credit applications, debt, and more. The main components of your credit report are:
- Personal Information: Your name, address, Social Security Number, date of birth, employment history, etc. This information is the ‘fingerprint’ of your credit report, distinguishing you from other consumers. It does not affect your creditworthiness.
- Credit Accounts: Sometimes called “Trade Lines”, this is a list provided by lenders of every credit account you have opened, such as credit cards, store charge cards, car loans, personal loans, and home mortgages. This information includes the date the account was opened/closed, the size of the line of credit, your current balance, and more.
- Payment History: Under each credit account is a list of payments you have made. This shows whether each payment was made on time, 30 days late, 60 days late, or 90+ days late. When a lender reviews your credit report, they can quickly see the pattern of payments and deduce how well you manage your debts over time.
- Credit Inquiries: This is a list of every lender that has requested a copy of your credit report in the last two years. Hard inquiries occur when you apply for a loan or credit card. You are asking the lender to review your credit report. Soft inquiries occur when you review your own credit report or a lender pulls your credit to send you an offer. Soft inquiries do not impact your credit score.
- Public Records and Collections: These are records from state and county courts, including bankruptcies, foreclosures, liens, and judgments.
There are three major consumer credit bureaus – Equifax, Experian, and Transunion. Each bureau has its own reporting system and credit scoring model. Lenders may request a report from one or more bureaus when you apply for a loan or a line of credit. Some lenders prefer the reporting procedures of one bureau over the others. Credit reports can also be used for pre-employment background checks and rental applications.
How to Get a Copy of Your Credit Report
By law, all Americans are entitled to receive a free copy of their credit report each year, which they can request through AnnualCreditReport.com. Additionally, you may request a report directly from each credit bureau: Experian, Equifax, or TransUnion. If you are a victim of fraud or suspect fraud on your credit report, you may be entitled to more than one free credit report for the year. Some lenders will also offer a copy of your credit report if they conduct a hard inquiry. Ask about this option when applying for a loan or credit card.
What Is a Credit Score?
A credit score is designed to be a single number that represents a person’s creditworthiness. This number is created by applying a proprietary formula to all of the data included in a consumer’s credit report. There are several different companies that offer credit scores, and each company may offer more than one credit scoring model to lenders. Typically, credit scores range from 350 to 850, although each scoring formula will vary somewhat.
Every person has multiple credit scores, but the most widely used scoring model comes from the Fair Isaac Corporation (FICO). FICO credit scores are determined by the following:
- 35% Payment History
- 30% Credit Utilization (Amount Borrowed vs. Available Credit)
- 15% Length of Credit History
- 10% New Credit
- 10% Diversity of Credit
How Long Does It Take to See Changes?
Credit scores change constantly based on the factors above. However, the changes may take 30-60 days to go into effect. For instance, if you pay off your credit card debt, it may take a couple of months to see the boost in your credit score. If you acquire new debt, your credit score may temporarily drop in the next month. It should only take a few months of positive payment history for your score to bounce back.
Multiple Types of Credit Scores
In addition to base credit scores, FICO offers industry-specific credit scores. This puts more weight on a specific type of credit, such as auto loans or credit cards. A lender may refer to an industry-specific credit score to get a better idea of how applicants handle their target line of credit. A person with great loan management may not make consistent credit card payments. These specialized scores provide a true picture of a person’s creditworthiness in a given scenario.
Credit Resilience Index
As of July 2020, there is yet another type of credit score to keep in mind. The Fair Isaac Corporation released the FICO Resilience Index, which measures how likely a consumer is to recover after a financial crisis. The scores range from 1-100, with lower numbers representing higher resilience. In theory, someone with a low credit score would have a high resilience score, but that is not always the case. FICO used credit data around the Great Recession to identify behavior patterns for resilient and non-resilient consumers. In the wake of the COVID-19 pandemic, FICO created an index with this data to evaluate the patterns of modern consumers. In some cases, consumers with low credit scores have behavioral patterns that align with formerly-resilient credit profiles. Thus they may have a ‘good’ resilience score, regardless of their base credit score.
What’s the Difference Between a Credit Score and a Credit Report?
Think of your credit report as a school essay and your credit score as the grade you get on the essay. Your credit report provides the information necessary to formulate your credit score. The credit report also gives lenders a detailed view of your debt management. Perhaps you have a low credit score from financial mistakes several years ago. Your credit report may show positive payments over the last six months, marking an improvement in your financial situation. Lenders can take that into account to further assess your creditworthiness.
Both Are Important – Here’s Why
Since your credit score is determined by data in your credit report, both are inextricably linked. At the same time, both your credit report and your credit score are used for different purposes. When applying for most kinds of revolving credit, such as credit cards and store charge cards, it is likely the lender will only request a copy of your credit score. This is the reason that credit scores were created, so lenders can make a quick determination about an applicant’s creditworthiness.
In other cases, the information on the credit report itself is vital. For major loans, such as home mortgages and car loans, lenders are likely to request complete copies of the credit report from one or more of the three major consumer credit bureaus. Lenders will look closely at the applicant’s account histories, debt levels, and payment records. Further scrutiny will be placed on public records such as bankruptcies, judgments, and liens. In addition, your credit report may be requested as a part of a pre-employment background check or a rental application. It shows how often you make on-time payments, regardless of your credit score.
Monitor Your Credit Score and Credit Report for Discrepancies
Credit Report Check
It is important to regularly check your credit reports for accuracy and dispute any inaccurate information. This includes fraudulent loan or credit card applications, unauthorized credit inquiries, false payment records, and more. You can dispute errors on your credit report through the credit bureau or through the company responsible for the error. It may take up to 60 days for a dispute to fully process, so take action as soon as you notice an issue.
Credit Score Check
It is also a good idea to periodically check your credit score, which can alert you in advance to any potential problems in your credit report. Thankfully, many credit card issuers currently offer free FICO credit scores with monthly card statements. If you see an unexplained drop in your credit score, check your report to determine the cause. Then rectify the matter accordingly.
When to Freeze Your Credit Profile
If you have been notified about a data breach in which your personal information was compromised, consider initiating a credit freeze. This will prevent anyone from applying for a loan or credit card in your name. If you simply think one card may be compromised, you can order a new card or put a hold on your credit card account while the matter is sorted. For instance, if you lost your credit card, you can ‘pause’ the account while you look for it. Reactivate when you find the card, or order a replacement card without the risk of fraudulent charges.
Credit scores and credit reports are not always fun to deal with, but they are a necessary part of our personal finance system. By understanding the difference between these two important components of your credit, you can ensure that you take the proper steps to maximize your chances of being approved for a loan or credit card.
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