Understanding the Differences Between Credit Score and Credit Report

Contrary to the misguided idea of credit reports and scores being the same, they are very different financial factors. It’s important for all people to gain a true understanding of what each of these aspects of personal finance are and how they differ. Each of these factors will impact your ability to receive a line of credit in its own way. Your reports and score will allow you to see what may be hindering credit approvals and what is working in your favor.

A Credit Report
This report is a complete list of all your current and past financial activities. The list will include where you live, your bill paying methods, any lawsuits, criminal arrests and bankruptcy filings. The information collected by credit report agencies gets sold to employers, creditors, insurance agents and other entities that feel they need to evaluate your credit history to approve an application. For this reason, it’s vital to periodically check your credit report for any fraudulent (unauthorized) use of your identity. You will be able to have this done online through a multitude of different authorized websites. By law, every citizen is entitles to one free credit report per year.

Free Annual Credit Reports You’re entitled to one free annual credit report from each of the three main credit bureaus. The three bureaus are, Trans Union, Experian and Equifax. If you request your reports online, you will be able to view your reports instantly as opposed to waiting for them to arrive in the mail. Free reports can also be requested by phone or by sending in a mail-in request. Be aware, there is a process time of up to 15 days for all phone or mail-in requests.

A Credit Score Once the activity on your credit report is reviewed, it is given a credit score. The higher you score on this review, the better your rating will be. Ratings are based on a FICO score range of 350-850. A FICO score is a term derived from a formula model developed by the Fair Isaac Corporation and is the most common method of determining a credit score.

While all three reporting bureaus use the FICO model, each has its own independent formula to calculate final results. This is one contributing factor as to why you may get different results from each agency. Some varying results may also come from the fact that not all financial providers report your records to all three agencies. There is also a chance that someone is using your identity. This is a crucial reason why everyone should check his or her report regularly. Getting errors fixed can take time. Any errors you find or are suspicious of should be reported immediately.

While the FICO model is still in use today, a newer rating method is generating some attention, VantageScore. This new system uses a score range of 501-990 and is suppose to be a simpler and easier scoring method to understand. The claim is that this new method provides a greater degree of accuracy and is a fairer model for people with a short credit history.

The Federal Reserve does not regulate credit scores, but lenders are required by law to inform a consumer if their credit score was a contributing factor in certain terms of loans (e.g. fees, high interest). If a score is used to deny a loan, the lender will also be required to disclose the credit bureau that was used to obtain the score use.

Conclusion The way in which you have managed your finances in the past, up to the current date is what will be on your credit report. This data is then used by the credit reporting agencies to calculate your credit score. The score provided by the reporting agencies is the reflection of your current financial condition and your ability to manage finances. Your credit score is what lenders/financial institutions will use to determine if and how you will be allowed to borrow money.