I’ll be honest. I’ve used these terms interchangeably for too long. But, after spending a little time immersing myself with information, I’m able to explain how the two differ and share that knowledge with you.
Both credit reports and credit scores are vital in the long-term success of one’s financial well-being. Most people know that having a good credit score is important. But why? What does a credit report contain? You’ll find answers to questions like these and many others below.
What is included in a credit report?
A credit report is a summary of your credit accounts, and your history with those accounts. It’s maintained by a credit bureau or credit reporting agency. Do you consistently pay off debts and other bills on time? Or do you find yourself collecting debt from unpaid bills? Anyone that looks at your credit report will be able to answer these questions.
Also included is a detailed list of your credit cards along with your balance, credit limit, account type, and account status. Another section covers any loans you’ve taken out as well as loan balances, original loan amount, and payment history.
That may seem like a lot of information, but there’s more. Credit reports include a list of all businesses that have recently checked your history due to an application you made or a screening. These are known as inquiries.
What is included in a credit score?
A credit score is a number, that’s it. OK, there’s a little more to it than that. In simple terms, a bunch of information from your credit file is mixed together. The end result is a three-digit number that is used by lenders and landlords to assess your “credit risk.” Using your past trends, your credit score helps to predict how creditworthy you are. In other words, it will give anyone checking your score a better understanding of how likely you are to repay a loan and make payments on time.
A complicated formula is used that takes into account payment history, amounts owed, length of credit history, new credit, and types of credit. Once that information is compiled, your score is configured. Credit scores change over time to reflect your current financial trends. Factors such as race, religion, and sex are not included in your score because they have not proven to have any impact on calculating a credit score.
What’s a good credit score?
FICO (Fair Isaac Corporation) is the most common type of score used because it’s widely considered to be the most accurate. Scores generally range from 300 to 900. Excellent credit would place you with a score of 720 and above. Good credit ranges from 660-719. You have fair credit if your number is between 620-659. If your number is 619 or below, you have some work to do.
How do I improve my credit score?
These steps are easier said than done, although they are necessary.
1. Pay your bills on time. Late payments (even if only a few days late), can have a major negative impact on your score.
2. Reduce the amount of debt you owe. Make a list of all of your accounts and determine how much you owe on each and what interest rate each is charging. Put an emphasis on making payments toward the accounts with the highest interest.
3. Setup payment reminders. As mentioned earlier, paying bills on time goes a long way in helping your score. Even the occasional “Oops, I forgot to pay my cell phone bill last week” can negatively impact you.
Credit scores and credit reports, while different, are extremely intertwined. It’s important to check both on a consistent basis, such as every quarter, to ensure everything is accurate. Regular checks help protect against identity theft. By checking regularly, you’ll be able to identify any suspicious activity and take care of it immediately.