Last Updated on June 24, 2022 by Luke Feldbrugge
Credit score vs credit report, seriously, what is the difference? A credit report is a historical tracking system of how you use credit. A credit score essentially summarizes your credit history into one number. The information and data contained in a credit report is used to calculate your 3-digit credit score. If you are planning to apply for a car loan, mortgage, or credit card, lenders will look at two things to help determine how risky it is to lend you money and your ability to pay back borrowed money, and they are your credit score and credit reports.
What is a Credit Score?
Your credit score is a number that represents your credit history. It helps a lender or bank calculate the level of risk they take on by lending you money. The risk is the likelihood of you paying the money back. In order to quantitate that risk, lenders use the credit score system.
The FICO score rating system is the most commonly used credit score rating system. It’s the first thing a lender will look at when you apply. Your FICO score can range from 300-850, with 850 being the best possible score. FICO takes a few things into consideration to determine your FICO score: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%) The following scores are how FICO breaks down your credit rating.
- Exceptional: 800 – 850
- Very Good: 740 – 799
- Good: 670 – 739
- Fair: 580 – 669
- Poor: 300 – 579
Your credit score will continue to change over time as you complete new financial transactions. The changes can both positively and negatively affect your score. Good financial habits help keep your credit score strong. But, there are also some practices that can hurt your credit score.
Good Financial Disciplines that Help Your Credit Score
- Pay bills on time
- Making on time and in-full payments on loans and credit cards
- Low credit utilization ratio – the percentage of credit you are using of the total available credit limit available to you
Things that Damage Your Credit Score
- Missed loan and credit card payments, especially multiple missed payments
- If you have ever filed for bankruptcy
- Carry excessive debt (examples might be large unpaid loans or credit card balances)
Things That Do Not Affect Your FICO Credit Score
There are some things that FICO does not take into consideration when calculation your credit score. Some of these are illegal to factor in, and some have little to no bearing on your ability to pay debts back. However, some lenders will take some of these factors into consideration when assessing your risk. The FICO score is an estimate for the lenders, but it is up to each lender to approve your loan. The items that do not affect your FICO credit score are:
- Race, color, religion, national origin, sex and marital status – it is illegal to assess credit based on these factors under the Consumer Credit Protection Act
- Your age cannot be taken into consideration
- Salary, occupation, title, employer, date employed or employment history – some lenders may take these factors into consideration, but they use this information to asses your career stability, and therefore ability to pay back your loan
- Where you live cannot be taken into consideration
- Any current interest rate being charged – interest rates can be an indicator of your ability to pay back, as generally lower credit scores have higher interest rates. If you have a long-term loan that you received when you had a lower credit score and have since raised your score, that interest rate will not affect you.
- Any items reported as child/family support obligations
How to Check Your Credit Score for Free
People are increasingly aware of how important their credit score is for their financial well-being. There are many companies who charge a fee to provide you with a credit score or report.
However, to be more competitive, the recent trend for many banks and credit card companies is to offer a credit score service to their customers. Sometimes, these institutions will include your credit score on your statements, or it may be included on your account when you are logged into your online profile. Check with your financial institution to see if this is a service they offer.
What is a Credit Report?
Credit reports contain all of your lines of credit and payment history since you began borrowing and spending. They contain all of the accounts you’ve ever opened or closed, like that department store card you signed up for to get an additional 25% off, then closed right after you paid it off. They contain all of the loans you’ve taken out, like loans for education or cars, and all the payments made on those loans. Credit reports also contain any other outstanding debts you may have and the payments made on those.
One thing to note is that sometimes credit reports have errors. It’s important you look through your credit reports carefully and dispute any errors you find. There might be a credit card that you closed that shows up as still open, or maybe you paid off a loan early but it still shows as active. Remember, just because you cut a credit card up with a scissors doesn’t mean the account is closed!
Free Credit Reports
As an American, every 12 months you can get one free credit history report from each of the three major credit bureaus: Equifax, Experian and TransUnion. Each of the three credit reports may have different information, so it’s good to review all of them.
You cannot be sure which report the lender will look at to evaluate your credit history, so keep them all up to date and accurate. Reviewing your credit report once a year can give you a better understanding of your financial situation. Checking your report can even alert you to things like identity theft, which can severely hurt your credit score if someone opens accounts in your name.
The easiest way to get your free credit history report is to visit AnnualCreditReport.com. This is the official credit history report website as declared by the U.S. federal government’s Consumer Financial Protection Bureau.
What is a Good Credit Score to get a Mortgage?
Typically, you want a credit score of 620 or higher. Each lender has their own scores and assessment thresholds though, as they are the ones assuming your loan risk. There are also different types of mortgage loans to meet different credit score ranges, even bad credit. To learn more about which scores can help you secure a mortgage or refinance your current one, sign up with Homes for Heroes.
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Homes for Heroes is a national program dedicated to helping our local heroes save money on buying and/or selling a home, or refinancing their current home. On average, Homes for Heroes helps firefighters, EMS, police, active, reserve or veteran military, nurses, doctors, and teachers save $2,400 on their home transactions. Simply register online to speak with a Homes for Heroes real estate or mortgage specialist about how they can help you find the home you want, with the credit score you have, and save you significant money in the process.