Credit scores and reports can be confusing, but if you want to take out a loan for a house or car one day, you need to understand what they are and why they’re important. We take a look at what you need to know about your credit score and report.
What Are Credit Scores and Credit Reports?
A FICO credit score is a number that ranges from 300 – 850 and is used to indicate your creditworthiness. Lenders look at your score as an indication of your ability to repay your debts.
A credit report is a detailed overview of your credit history. It includes all your credit accounts, credit cards, loans, credit limits, account balances and payment history.
Knowing both your credit score and what’s on your credit report is essential, because without your report, you don’t know what factors influenced your score. Your report will give an overview of what you’re doing right and areas where you can change your behavior to increase your score.
Factors Affecting Your Credit Score
Your credit score is determined by many different factors:
- The type of credit you have. For example, student loans, car loans, and your mortgage as well as store credit cards.
- Credit utilization. This is how much credit you’re actually using. Using too much of your available credit will increase your score.
- Late payment history. Late payments negatively impact your score the most in the first two years, but they will stay on your report for seven.
- A study by the FTC found that one in five consumers had an error on their credit report that could be corrected by a credit reporting agency. Twenty percent of the consumers who found errors experienced an increase in their credit score once the error was removed.
Make sure your report is up to date before you go to a lender for an auto or home loan; you don’t want to be denied for a mortgage over an error that could have been prevented. If you do find a mistake, file a dispute with the creditor and the credit bureau to get it fixed immediately.
Why They Are Important
Your credit score is important for a few reasons. First, it influences your chances of getting approved for a loan or credit card. This is particularly important if you want to purchase a home in the future because your score will influence your mortgage eligibility.
Your score also influences your interest rate; the higher your credit score, the lower your interest rate will be and vice versa. Because your score is supposed to show your ability to repay your debts, lenders want to ensure you’re going to pay them back in full, so they might give you a higher interest rate or deny you altogether if your score isn’t high enough. This can cost you a lot in the long run and might even mean you’ll have to rent instead of purchase.
Getting your credit score and not your report is similar to getting a test grade in school without getting the actual test back. How can you know what you did wrong and what you did right without the actual test? Credit scores and reports work in the same way. You won’t know what has influenced your score if you haven’t seen your report. Use a site like Rocket HomesSM to obtain your score free of charge and to view your report. Once you have this information, you can determine what’s impacted your score so you can take steps to improve or maintain it.
Do you have any questions about your credit score? Post in the comments!
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