Credit Scores vs. Credit Reports

Maintaining good credit is right up there with eating your veggies and brushing your teeth.  Simply put, if you take care of your credit, it will take care of you and banks will loan you money to buy things. But what is credit? Do we mean your credit report or your credit score?

Simply put credit is your ability to convince others to let you borrow money. Your credit, good or bad is a result of your credit report and your credit score. Let’s define those terms so that that you can then understand just how good your credit is or how to fix it.

The first thing that we need to do is to clarify the difference between a credit report and a FICO credit score, since these two words are often incorrectly used interchangeably.  It is really quite simple, a credit report is a report that lists all of your financial actions as they pertain to financial accounts that you may have and how well you pay your bills.

Get your Credit Report and Score for Free!

Your FICO credit score is the result of a credit scoring model, which is calculated by a private company called Fair Isaac & Company.  FICO analyzes the information contained in your credit report and applies a score that lenders use to predict your credit risk.  To add a bit more complexity, there are actually two other credit reporting agencies that perform the same analysis as FICO does, which gives you the possibility of actually having three different “FICO” scores.  Lenders will generally take the middle score when analyzing your overall credit.

Here’s how your credit score is calculated:

• On-time Payments (35%): Do you pay your bills? If so, are they paid on time? If not, how late are they and does this happen often? Late is bad but 90 days late is much much worse than 30 days late.
• Credit Usage Ratio (30%): How much do you collectively owe across all credit cards? What is the total credit limit across all credit cards? The ratio of how much you have available is what's measured here. More is better.
• Length of Credit History(15%): A longer credit history will increase your score. Creditors want to see you have experience managing credit plus, the more items being averaged into a score, the less any one item will affect it.
• Credit Inquiries(10%): How many new accounts do you have? What is the length of time since they were opened? How many requests for credit have you and or lenders recently made?
• Mix of Credit (10%): Looks at the diversity of the types of accounts on your credit report (lines of credit, installment loans, mortgages, etc.) The better the balance - the higher the score.

So, now you can see how your credit score is calculated and reported.  You should also know that once you hit the age of 18 years old, you will officially be assigned a credit report, whether you ask for it or not.  It will sit with the three reporting agencies until you or a potential lender asks for the information.  Also know that you are entitled to one free credit report per year and it is a very wise decision to take a thorough look at your report to make sure that it is providing valid information.  You can also access your FICO credit score at any time you wish.

Get your Credit Report and Score for Free!