What are Credit Reports and Credit Scores?

It’s pretty clear that there are some major benefits to maintaining a positive credit history, as good credit is central to both financial responsibility and financial access. While it’s easy to see the consequences of bad credit, it can be downright confusing to actually keep track of your credit, especially if you don’t know the difference between credit reports and credit scores.

Why do your credit reports and scores matter?

Before we dig into what your credit reports and scores are made of, we want to explain why your credit reports and scores matter. Your credit reports and scores are the lifeblood of your financial life, as they help determine whether you get approved for a credit card, personal loan or mortgage, as well as have some major impacts on your personal life, as they are factors that help decide if you’re allowed to rent an apartment or even get a new cell phone plan. Whether you like it or not, credit reports and scores have a lot of impact on your life, which is why it’s essential to completely understand them. To help you make this distinction between the two, we detail everything you need to know about credit reports and scores.

What are credit reports?

We’ve already given you the breakdown on credit reports with our 101 series, but there are a few things that are important enough to reiterate. First, there are three major credit reporting companies that create credit reports – Equifax, Experian and TransUnion. Although there are three credit bureaus, not every lender you borrow from will report information to all three bureaus. This means that credit reports from each bureau will vary slightly, which is why it’s important for you to check all three of your credit reports and not just one. On top of your credit accounts, there are a number of things that are reported to your credit reports, such as your name, social security number, date of birth, current and previous addresses, marital status and more.

How can you check your credit reports?

While your credit reports may seem untouchable, you can actually check them quite frequently. In fact, the government allows you to obtain a copy of your three credit reports for free once a year through AnnualCreditReport.com. One thing you’ll want to note is that your credit report doesn’t track your credit score, and you’ll have to pay a fee to see your credit scores.

What are credit scores?

If your credit report is a report card, showing you the status of individual credit accounts, then your credit score can be thought of as your GPA. This is a commonly used analogy and while it’s accurate, keep in mind that unlike a GPA, you cannot calculate your own credit score from a credit report because there are a number of factors that make up your credit score. According to FICO (Fair Isaac Corporation), there are five factors that make up your credit scores: payment history (35%), amounts owed or balances due (30%), length of credit history (15%), new credit (10%) and the types of credit you have, such as mortgage and credit cards (10%).

Similar to credit reports, there are there credit scores for each of the bureaus (Equifax, Experian and TransUnion). As with credit reports, your credit scores are usually not the same for each bureau because not all of your credit accounts report to all three credit reports, which means the calculations may slightly differ from bureau to bureau. You might hear credit scores sometimes referred to as FICO scores. That’s because FICO (The Fair Issac Cooperation) is one of the more common scoring models used by lenders to determine your creditworthiness (or how likely you are to default on a credit account). That said, it’s really not essential to place an emphasis on the credit score model (regardless of whether it’s FICO, CreditXpert or another model), as all credit scores reflect the same information, meaning for all intents and purposes, it doesn’t really matter what scoring system is used to generate your score.

How can you check your credit scores?

Unlike credit reports, consumers are not entitled to free copies of their credit scores every year, which is why you have to pay a fee if you opt to review them with your credit reports, as described above. Even though you don’t get a free copy of your credit scores each year — although that may change soon — it doesn’t mean they’re inaccessible, as there are a number of ways you can view them. For example, certain credit cards like Discover it – Cashback Match and the Barclaycard Arrival Plus World Elite MasterCard, among others provide you with one of your credit scores every month. It should be noted that while checking one credit score is helpful, it’s not enough, as not all three of your credit scores are the same, as detailed above. So while your Experian score may be a 725, your TransUnion score may be a 680, but if you never check your TransUnion score, you’d never know it’s so much lower. Ultimately, keeping track of your credit scores is harder than keeping track of your credit reports, still it’s just as important.

Is there a way to keep track of all three reports and scores?

One of the easiest ways to keep track of all three of your credit reports and scores is to enlist the help of a credit monitoring service. For an affordable monthly fee, these services provide you with updated copies of your credit reports and scores on a regular basis, so you can not only be aware of where your credit sits, but also be in the know if anything ever changes with your credit reports and scores. One thing you’ll want to look for when you determine which credit monitoring service is best for you is you’ll want to pick a service that provides you with all three of your credit reports and scores, as tracking only one or two of your reports and scores isn’t as effective. Also, if you only check a one or two of your reports and scores, you may not be aware of fraudulent accounts opened by identity thieves on other reports, which can be a nightmare to deal with as they will wreak havoc on your credit scores. Most of the services we review, including top-rated options Identity Guard, FreeScoresAndMore, PrivacyGuard and LifeLock Ultimate Plus, provide you with all three credit reports and scores on a regular basis. In addition these services have tools to help you determine how certain financial moves, like paying off a credit card or opening a new line of credit, will impact your credit scores.

Other things to know about credit reports and scores

Although your credit reports and scores are completely separate things, one thing they have in common is that both are generated by evaluating or tracking your credit history. With this in mind, your credit report is best used as a way to validate the information that lenders and creditors sent the credit bureaus, rather than as a means of tracking your credit health, as your credit scores are better used in that aspect. Another thing to note is that your credit reports and scores are correlated. Since your credit reports have aspects of your credit history, usually derogatory marks on your reports, like late payments, will lower your credit scores. Similarly, positive marks on your reports, like paying off credit accounts, will raise your credit scores. This is why you absolutely must look at your credit reports frequently, because any mistakes on your reports will reflect poorly on your credit scores, even if you don’t realize it.

Written by Michael Osakwe July 21, 2016

Check your own credit reports regularly, before applying for new credit, to be sure they are accurate and up-to-date. As long as you order your credit reports through an organization authorized to provide credit reports to consumers, such as Annual Credit Report, your own inquiries will not affect your FICO Scores

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