Table of Contents
- Your credit report is an overview of your borrowing history over the last seven to 10 years
- Your credit score is a sort of “grade” given to your borrowing activity, with scores usually ranging from 300 to 850
- Different scoring models, such as FICO and VantageScore, give priority to different factors to come up with your scores
- You can boost your scores by improving the information in your credit reports, either by disputing inaccuracies or changing your borrowing habits
Credit reports and credit scores are both highly influential for your financial life. Lenders use both tools to assess your risk level as a borrower and determine your eligibility for new credit.
As important as both are, the two tools aren’t the same. Credit reports contain a summary of your recent borrowing behavior, and the data within is used to calculate your credit scores. Understanding these distinctions will help you as you seek to monitor your credit and build a strong profile as a borrower.
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Credit Reports Explained
Your credit reports are issued by the three credit bureaus — Experian, Equifax, and TransUnion. They contain a detailed history of your recent borrowing activity, with some information going back as far as 10 years.
In your credit report, you’ll see information about your current and past credit accounts, such as mortgages, auto loans, home equity loans, and credit cards. It will include payment activity, outstanding balances, and monthly payments due. Credit inquiries — when companies formally check your credit — stay in your report for two years. Additionally, your report contains negative information such as loan delinquencies, collections activities, bankruptcies, and tax liens.
Credit bureaus compile this information based on reports they receive each month from creditors, debt collectors, government agencies, landlords, and any other businesses to which you have a financial obligation. Not all creditors report to all three bureaus, so the information may differ slightly across the three reports.
Credit Scores Explained
Your credit score takes all the detail in your credit report and summarizes it with a simple three-digit number, which usually ranges from 300–850. This serves as a sort of shorthand lenders can use to quickly assess your risk level. Contrary to popular perception, your credit reports don’t actually contain credit scores. Your scores are based on the information in your reports, but they’re entirely separate. Although there are several credit-scoring models, the two most widely used are FICO and VantageScore. Credit score ranges differ slightly between the two, as you’ll see in the following table.
| FICO/VantageScore Rating | FICO Range | VantageScore Range |
|---|---|---|
| Exceptional/Excellent | 800-850 | 781-850 |
| Very Good/Good | 740-799 | 661-780 |
| Good/Fair | 670-739 | 601-660 |
| Fair/Poor | 580-669 | 500-600 |
| Poor/Very Poor | 300-579 | 300-499 |
Depending on where your score falls, it may disqualify you from certain loans on the low end or qualify you for better rates and terms on the high end.
How Your Credit Report Shapes Your Credit Scores
Although the two main scoring models differ slightly in how they assess your credit history, both emphasize similar factors when tallying your credit score. These come down to five major categories:
- Payment history: Late payments have the biggest impact on your credit score. Creditors typically report them once you’re more than 30 days past due, and even a single late payment can hurt your score significantly.
- Credit utilization: This primarily measures your credit card balances as a percentage of your total credit limit. Anything under 30% is considered good, but the lower it is, the better it is for your score. Balances on fixed-installment loans such as mortgages play a smaller part.
- Age of credit: This reflects the average age of all your accounts. The longer you’ve had accounts in good standing, the more it will benefit your scores. Conversely, opening a new account will lower your average age and cause your score to dip temporarily.
- Credit mix: Lenders like to see that you can handle different types of credit, so it’s important to open revolving loans (like credit cards) and fixed-installment loans (like auto loans and mortgages).
- Recent credit inquiries: Each time a lender formally checks your credit, it dings your score. These stay on your report for two years, so it’s important to spread out your credit applications to avoid hurting your score too much.
The exact weight of each category varies depending on the credit scoring model, and each model has different versions that lead to even more variations. In general, your payment history and credit utilization have the greatest impact on your score.
Although your credit score is based on your credit history, that doesn’t mean you can’t influence your score. By practicing good borrowing habits in the above categories, you can build a strong score over time.
How Credit Scores And Credit Reports Are Used
Credit reports and scores play a significant role in your financial life. Banks aren’t the only institutions that use them to assess your risk level. For instance:
- Insurance companies can assess your credit to determine whether you can pay your premiums and how much coverage you qualify for.
- Telephone and utility companies may check your credit and require a deposit if your credit score doesn’t meet their threshold.
- Landlords can run a credit check to determine whether you can rent property.
- Employers can even access a condensed version of your credit report to determine whether you’re financially responsible enough for certain roles.
Each institution may assess your credit scores and reports differently. They may pull one report or all three, or they may only look at your score. If you’re denied a loan, a job, or insurance coverage, the company must notify you and provide the source of the disqualifying information.
Common Misconceptions About Credit Reports and Scores
Given how important credit reports and scores are, it’s not surprising that there are many myths and misconceptions about them. Many of these myths prevent people from taking proactive steps. Let’s look at three in particular.
Checking Your Own Report Or Scores Will Hurt Your Credit
Checking your own credit report never affects your score in any way. Only “hard inquiries” — official credit checks from financial institutions or other companies — hurt your score. You are free to check your credit or use credit score monitoring as often as you want, though you typically can only get one free copy of your credit report per year from each bureau.
Once Your Score Is Bad, You Can’t Fix It
A poor credit score reflects your recent borrowing behavior, and you can correct it by changing that behavior. Although some negative information stays on your report for up to 10 years, its impact lessens as your report begins to show positive trends such as on-time payments and accounts in good standing.
You Can Pay To Have Negative Information Removed From Your Report
Credit repair agencies can help you remove errors from your report — and this can improve your credit score. However, no company can remove accurate negative information from your credit history. If it’s correct, then you simply have to give it time to roll off your report while you work to improve your credit habits.
Monitor Your Credit Reports And Scores Regularly
As you seek to build a good credit history, regular monitoring is one of the best things you can do to ensure you’re on track. You can always order one free credit report from each bureau every year at AnnualCreditReport.com. You’ll typically receive a copy of any credit reports lenders pull when you apply for credit, too. Take time to review each one to ensure there are no errors, and report issues promptly to prevent them from affecting your scores.
Various paid credit monitoring services let you track your credit scores and information in your reports. However, many banks, credit card issuers, and financial service providers offer similar services to customers for free. Before you pay for credit monitoring, see what’s available via your existing accounts or budgeting apps you already pay for.
Get Proactive With Your Credit
Your credit reports and scores are two of the most vital components of your financial life. As in so many things, knowledge is power when it comes to your finances. Understanding how your credit works and what you can do to shape it will help you build good credit in the long run. Ultimately, this puts you on the path toward more financial freedom.
Frequently Asked Questions (FAQs)
Is Credit Score Or Credit Report More Important?
Your credit report is more important. Your credit score is a reflection of the information in your credit report. If you want to change your score, you must correct negative information in your credit report and practice better borrowing habits.
Why Do I Have Different Credit Scores?
Each credit bureau receives information independently from creditors and other reporting agencies. Because not every company reports to all three bureaus, you may have slightly different information in your reports, and thus, slightly different scores. Lenders also rely on different scoring models to assess your credit report.
Which Credit Report Is Best To Request?
All three bureaus carry equal weight, and you never know which report a lender will pull when checking your credit. It’s a good idea to request a report from each bureau every year.
How Do I Dispute Information On My Credit Report?
Report any errors you find on your credit report directly to the credit bureau that included them in your report. It’s also a good idea to report them to the creditor who originally provided the information. Fill out any dispute forms provided by the bureau, and file your dispute with certified mail. For more guidance, see our guide to disputing errors in your credit report.
Find out more
- Explore the 5 Cs of Credit – Dive deeper into the critical elements that shape your credit profile.
- Best Credit Repair Companies – Discover leading services for effective credit repair.
- Credit Score Monitoring Services – Stay updated and secure with top credit monitoring options.
- Can Landlords Affect Your Credit Score? – Uncover how your rental history might influence your credit score.
- Cheapest Credit Repair Services – Find affordable solutions to repair your credit efficiently.
- FICO vs VantageScore – Understand the differences and similarities between these two scoring models.
- How to Build Credit Fast – Accelerate your journey to a better credit score with these tips.
- How to Build Credit – Implement effective strategies to establish and grow your credit history.
