Your credit score and how it differs from your credit report

Following World War II, America emerged as a superpower, both in military might and economic strength. New cars, sprawling suburbs, and other consumer goods were available to an entirely new class than ever before. Americans needed a way to pay for retail goods and services without having their pockets stuffed with cash. What if people had something small that they could carry in their wallet that guaranteed payment to shops and stores? The first credit cards appeared in the 1950s and skyrocketed in popularity. They were so popular that, in the 1970s, the federal government passed a law that stopped an Atlanta credit reporting company from collecting data on consumers’ race, disability, personal preferences, and political affiliations.

This created a need for a fair and unbiased qualification system where Americans’ financial information could be recorded in a credit report.

What is your credit report?

A credit report is an extensive record of your financial history and how you’ve handled the obligation to repay your loans. Depending on how long you’ve been attached to lines of credit or loans, your credit report can be several pages long. Lines of credit that you’ve opened or closed, auto loans, home loans, even civil cases such as bankruptcy and lawsuits will also appear in your report. This report is used by landlords, insurers, and lenders, including credit card companies.

The data in your credit report is sent to the three National Credit Bureaus, who then calculate your credit score.

What is your credit score?

Experian, TransUnion, and Equifax are commonly known as the three National Credit Bureaus. The three “National” Credit Bureaus are attached to that adjective because they are the largest and are traditionally known for setting the standard in credit reporting and scoring practices. It’s important to note here that these are for-profit businesses (not government agencies) and they make money by offering to sell your scores to banks and lenders across the nation for marketing purposes. But that’s not always a negative practice because, with so many lenders in the market, they have to compete for your business and not the other way around.

Today, we do know that your score is based upon various factors in your financial history. It’s not an even distribution among the factors, meaning some are weighted heavier than others. Here are the approximate components of your credit score:

• Payment history 35% – negative information such as late payments, bankruptcy, and liens will cause your score to drop.
• Amount of debt 30% – there are six different metrics that go into the debt category.
• Length of credit history 15% – a combination of the average age of your accounts and the age of the oldest account.
• Types of credit 10%– different types of credit such as a mortgage, an auto loan, and credit cards will raise or drop your score.
• Recent searches for credit 10%– also known as “hard pulls” within the context, this is factored by companies looking at your credit score when you apply for a substantial loan. Multiple hard pulls can make your credit score
  • PRO TIP: When shopping around for a loan within a short time frame, most scoring models count clustered “hard pulls” within a time limit of 14-45 days as a single combined inquiry, limiting the decrease in your score.

Interpreting your credit score from the three National Credit Bureaus

Your credit score from the three National Credit Bureaus is a three-digit number between 300 and 850. Use the table below to see where your credit score falls.

Source: Experian 

Why should you monitor your credit report and your credit score?

Monitoring your credit report is important because they sometimes have errors that you can dispute. Your accurate credit report will hopefully maximize your credit score, thus affecting the interest rate you would be offered from say, a mortgage lender. Some use a score from a particular National Credit Bureau, some take an average of all your credit scores, some use your middle score (rather than the highest or the lowest). If your score is on the cusp of “fair” and “good,” that could mean tens of thousands of dollars you pay in interest over the life of your loan. To find out just how much your credit score will affect you qualifying for a home loan, check out How Important is Credit in the Mortgage Application Process.