A Simple Guide to Credit Report vs Credit Score explained - Investadisor (2024)

Credit Report vs Credit Score. What’s the difference

The global economy is driven and thrives on credit. Credit means getting something of monetary value today and promising to repay it at some point in the future with interest.

Understanding the difference between a credit score and a credit report is explained in detail, just read to the end. A good credit score and report can surely enable you to live in a nice neighbourhood, get you approved for a consolidation loan in a financial crunch, and live in a nice apartment.

There are two factors that help lenders determine the probability that you will repay the loan as agreed and that’s: credit reports and your credit scores.

What is a Credit Score?

A credit score is a number ranging from 300 to 850 that represents the probability of a borrower to repay a loan or credit. Your credit score information is mainly used by lenders and creditors, for instance, financial institutions, credit card companies, and car dealerships before they offer credit.

Many creditors use credit scores to assess the likelihood that you will pay back a loan, mortgage, or credit card.

The higher the score the more appealing you’re considered in the eyes of lenders. Many factors determine your credit score for instance your credit history, number of credit accounts currently open, total accumulated debt, and your repayment history.

A higher score may have a huge impact on your financial future therefore it needs to be selfishly guarded. If your score is lower than 640 it’s considered poor therefore you’re a risky borrower. A score of 700 or higher is thought-out to be strong.

Credit scores better than 800 are exceptional. Normally, lenders offer the most favourable credit terms when you’re borrowing with a high credit score like low-interest rates for loans and mortgages. Leading to lower total interest costs to the borrower.

Here are the credit score ranges:

300-579: Poor
580-669: Fair
670-739: Good
740-799: Very good
800-850: Excellent

Credit scores are tabulated using models that use sophisticated analysis based on your debt repayments and borrowing history recorded.

What is a Credit Report?

A credit report is a historical financial report card compiled by the credit bureau. The information on the report is primarily used by lenders such as financial institutions or banks and other credit-granting companies before offering credit.

Credit bureaus gather the following financial information about you :

Identifying information about you: Your first and last name, telephone number, your current, and previous addresses, Social Insurance Number/Social Security number, date of birth, employers current and previous, and then provide a credit report based on the information.

Your credit history of payments to credit lenders like financial institutions, retail stores, and loan companies

Your Public record information: Things that may affect your creditworthiness for instance judgments or bankruptcies.

Previous credit inquiries: All lenders or creditors you authorized to get access to your credit information.

Other related information, such as delinquent accounts in collections and banking information. Also, comprehensive account details such as credit card limits, lines of credit limits, date accounts were opened, past-due accounts, or in good standing.

Your credit report does not include your income, purchases made with cash or cheques. Additionally, it does not include information such as ethnic background, political affiliations, and medical history, ethnicity.

Lenders make use of the reports combined with other data to assess the creditworthiness of borrowers.

Consumers are allowed to get a summary of their credit report for free under federal legislation once annually. You can fill out a form to get free credit reports from AnnualCreditReport.com. It is critically important to get your credit report because there could be items that were inserted in error then you cal dispute and get them deleted.

Credit Report and Credit Score differences explained

There are many differences between a credit report and a credit score. Read below to find some interesting differences that you might not know already:

1.Nature:
A credit score is a number determined from the information in your credit bureau file that is used by credit grantors and employers to assess your credit risk at a particular point in time. While a credit score is a number that represents the likelihood of a borrower paying back a loan or credit as agreed. In addition, it’s a summary of your other bill’s repayment history.

2.Importance
A credit score is a number ranging from 300 to 850 which shows if an individual is worthy of being offered credit. Credit score information is primarily used by credit grantors, for example, banks, loan companies, and car dealerships before they offer credit.

A credit report provides information about your identity, Social Insurance Number (Canada) or Social Security number, date of birth, past and current employers, and then provide a credit report based on the information. A credit report itself is pretty important; however, a credit score cannot be calculated without the credit report.

3.Judge of Creditworthiness
Credit reports include a summary of your present or past loan transactions, history of payments to third-party accounts like retail stores, and other financial companies. Lenders use this information after assessing risk based on your credit score to grant credit.

A credit score tells lenders your ability to pay back an unsecured or secured loan. A 750 credit score is high enough to give lenders confidence that you have the capacity to repay a credit card limit of $5,000, everything being equal.

How is a credit score determined

FICO credit score
Your credit score is calculated and generated based on the software from Fair Isaac Corporation (FICO). The FICO score uses five variables in the report and it uses different variable weighting to arrive at the final score.

Below are the variables used to determine your credit score:

• Payment history (35 percent)
• Amounts owing (30 percent)
• Credit history (15 percent)
• New credit (10 percent)
• Credit mix (10 percent)

Your credit reports provide comprehensive details regarding the previous use of credit. That data is then crunched into a single value comprising your creditworthiness known as a credit score. Many credit scores use similar variables but there can be differences in the weighting placed on each variable.

Times Negative Information Stays on Your Credit Report

The negative information like late or missed payments, accounts sent to collection agencies, accounts not being paid in full as agreed remains on your credit report for about seven years. This is regulated by a federal law known as the Fair Credit Reporting Act (FCRA). Other delinquency such as bankruptcy will remain on your report for up to 10 years.

Hard Inquiry: Two Years

Hard inquiry or a hard pull is not always a bad thing. However, a submission that requires your entire credit report deducts a few percentage points from your credit score. Too many hard credit inquiries add up and could reduce your score if you overdo it. Fortunately, these can only stay on your credit report for two years from the date of the hard inquiry.

Delinquency: Seven Years

Late or overdue payments of more than 30 days, and defaults or accounts which have been transferred to a collections agency. All these remain on the credit report for seven years from the time of the delinquency.

Foreclosure: Seven Years

Foreclosure is a legal process by which a lender takes over the property or home from the owner and sells it due to nonpayment. This blemish will appear on the credit record for seven years from the date of the first missing payment.

Lawsuit or Judgment: Seven Years

Outstanding civil judgments stay on your credit record for seven years after the litigation. You can get a free credit report from the following three reporting firms, Equifax, Experian, and TransUnion. With a free credit history report, you can review or dispute any negative ratings included on your credit report in error.

Bankruptcy: Seven to Ten Years

Bankruptcy remains on credit reports usually around 7 and 10 years depending on the type of bankruptcy. Bankruptcy is viewed as the “Credit Score Killer,” it wipes off between 130 to 150 points off your FICO credit score. Completion in Chapter 13 of Insolvency is discharged seven years after declaration. Chapter 7, 11, and 12 of Insolvencies remain on your credit report for 10 years from the date of reporting.

Related: 15 Proven Strategies To Pay Off Your Credit Card Debt Fast

Advantages of a Good Credit Score

A good credit score is pretty important as it does help you in most aspects of your financial life.

Lower Interest Rates when borrowing

The interest rate is the cost of borrowing money. With a high credit score expect lower interest rates and many other favorable borrowing terms on mortgages or loans. A high credit score can get you approved for a low-interest rate on a mortgage from a bank or broker. This lowers the cost of borrowing and results in lower monthly payments. Lower monthly mortgage payments result in accelerated mortgage payoff and more disposable income to you.

A high credit score also can get you a much lower interest on a car loan. It gives you more negotiating power in the process as you can easily walk away from a business deal and easily get it someplace else.

Approved for High Credit Limits

Your credit approval financing potential is not only dependent on your salary but also on your credit score. One of the advantages of having a decent credit score is that lenders are likely to let you borrow more credit – if you’ve proven in the past that you pay back what you owe on time. You may still be eligible for certain loans with a poor credit score, but the amount approved will be minimal and at a much higher interest rate.

Better Car Insurance Rates

Car insurance providers use a credit report to assess the risk of would-be clients. They use information from your credit report and previous insurance records to determine your insurance risk ranking. You are penalized when you have poor credit that’s reflected in higher insurance premiums. On the contrary, a decent credit score will get you a lower premium for a comparable car value than a lower credit score counterpart.

Forgo Security Deposits on Utilities

Many utility companies conduct a credit check when signing up for utilities. If you have fantastic credit you save between $100 to $200 in security deposit money. The saving can go towards paying for the first and second months’ bill payments instead of being locked up with the utility company until you cancel the services.

Related: 8 Simple Tips to Fix Your Credit Score Fast

Disadvantages of a Poor Credit Score

Now that we know how a credit score can be beneficial if it’s good, let’s have a look at the other side:

Minimal to no chance of loan approval

If you have a bad credit history or records it prevents you from getting approved for a new credit card or loan -unless you have it secured by cash or other financial assets.

Getting an outstanding credit score does not guarantee acceptance, as lenders also weigh certain considerations, such as salary and other outstanding debt such as a mortgage. Hands down, a strong credit score improves the odds of getting approved for new credit or loans.

Pay High interest on loans

If you get approved for a car loan, line of credit, and mortgage, you get charged a higher interest rate. You are viewed as a high-risk borrower therefore private lenders or banks are inclined to charge you a higher interest rate.

Higher Insurance Claim Projections

Almost all insurance companies check your credit history and score. Based on historical statistical data. They believe that poor credit scores are correlated with an increased level of claims that a new client would make in the future.

Hard to Get a Job

Many job opportunities particularly in banking, investing, accounting, and higher management levels require employers to run a credit check. Employers use the information to make hiring decisions. If you have a crapy credit history for instance fraud, you may miss out on juicy employment opportunities.

Employers also check credit to get your financial snapshot of a potential hire, and also to see signs of financial stress that may reveal the risk of theft or fraud.

Difficult to Start Your Own Business

It’s extremely challenging with a poor credit score to launch your own company. Many start-up companies require a bank loan to get off the ground. With a poor credit score, banks and loan companies would be unwilling to approve a business loan application, despite an outstanding company proposal or business plan with surefire potential for success.

Conclusion of Credit Score and Credit report differences explained

Your credit score and your credit report are critical financial reports that should be protected. It’s recommended to at least get a credit check once a year. To see if you’ve accounts like credit cards and loans obtained in your name through fraud. Utilise credit reporting agencies like AnnualCreditReport.com to obtain a credit history report for free online.

A good credit score will enable you to get approved for a mortgage and live in a nice, safe neighborhood, get you approved for a car loan, and a consolidation loan to save huge interest cost s. For a renter, you can sign a rental agreement in a nice apartment with awesome amenities in the vicinity for your family and get approved for a line of credit in an emergency.

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