Whether you're buying a house, saving for a new car or planning for your financial future, you need to be aware of your credit background. This involves your credit score and credit report, both of which are used to give information about you and your spending habits.
If you don't understand the difference between the two, you might be surprised when it comes time to apply for a loan or a new place to live. Here are the key facts you need to know when thinking about your credit report versus credit score:
Understanding Your Credit Report
Your credit report sums up your entire history with credit. It collects data from your interactions with lenders, landlords, credit cards and utility companies, to name a few. Information comes from the major credit-reporting companies: Equifax, TransUnion and Experian.
The data these companies collect include:
- Basic information, like your name, address, birth date and social security information
- The types of credit you use and when you opened them
- Balances and availability on lines of credit you opened
- Payment history on bills and balances
- Collection agencies you have been sent to, if applicable
- New credit you have recently opened
- Tax liens, bankruptcy or court judgment records that are in your name
Your credit report gives a comprehensive picrure of your credit history, but it doesn't include the number that represents all that data. And that's where your credit score comes in.
Know Your Credit Score
A credit score takes all of your credit report information into consideration, puts it all through a mathematical formula, and produces a number. The FICO score is the most common and widely used credit score formula.
A FICO score ranges from 300 to 850, with below 400 being a poor score and above 700 being a healthy score. If you have a high score, lenders are more likely to offer you a loan because you have a history of making your payments on time and not taking on too much debt.
Here is what is taken into consideration in a FICO credit score:
- Your payment history - 35 percent
- How much you owe - 30 percent
- Length of your credit history - 15 percent
- Types of credit in your history - 10 percent
- Any new credit you have opened - 10 percent
How to Request Your Information
You can order a free credit report once a year from AnnualCreditReport.com. That will allow you to read through your entire history and watch for any suspicious activity. But accessing your credit score this way will usually cost you anywhere from $7 to $12.
Some companies like Credit Karma will give you a credit score for free, but that will only be an estimate -- or it will be a number pulled from one of the credit bureaus and won't be your actual FICO score. Yes, you have more than one score! Each entity generates its own score, but they're usually fairly close to each other (so it's okay to use a service like Credit Karma, because it provides a good estimate).
When you check your credit report, you might notice multiple credit inquiries listed. Those inquiries come from lenders obtaining a copy of your credit report after you apply for a line of credit. You might also find inquiries from companies you don't know. Luckily, your credit will only be affected by reports pulled from the credit you apply for.
That doesn't mean you should be worried about applying for any credit. The greatest risk to your credit is opening several new credit accounts in a short amount of time, so try to space them out as much as possible.
Keeping Your Credit Healthy
Whether there is a major financial purchase in your near future or not, healthy credit is something you should always strive for. Here are some tips to keep in mind:
Watch your credit balances. Pay down your balances and try to keep them at 30 percent of the credit limit or lower.
Don't look like a risk. For example, paying less on your debts, suddenly charging up more balances, or generating lots of inquiries during a small window of time are red flags to lenders. If you want to purchase a house, for example, don't go out and spend $10,000 in credit cards on furniture. That could affect your ability to secure your mortgage and may prevent you from getting the best interest rate available if that activity dings your score.
Be aware of your credit. Don't forget to request your report once a year and make sure everything lines up with your own records.
When it comes to your credit, knowledge is power. Understanding your credit score and becoming familiar with what's in your report helps you prepare yourself for major life decisions and purchases, and lets you know when you've veered off track. Keeping an eye on your history and preparing for the future are the best tools you have for a happy, successful financial future.
About the Author: Heather Swick is an author, freelance writer, and editor who has worked for news outlets, national magazines and blogs. She is driven to help others achieve their career and financial goals and share her own experiences along the way.