Credit Score, Credit Report, Credit Check- What's the Difference?

While you likely check your bank account balances regularly, your credit deserves the same attention. Your credit reports and credit score play critical roles in your finances and your ability to qualify for loans, credit cards, apartments, insurance, and more. In some cases, having poor credit can keep you from getting a needed security clearance or being hired for a job.

 

You need to understand your credit reports, credit scores, and credit checks to take control of your finances. Here's some information about each of these things and how they can impact your financial wellness.

 

Understanding Credit Reports

When you access your credit report for the first time, you might be surprised to see all of the information it includes. You'll find account and payment details for every credit-related account you've ever held.

 

Your credit report may also include a record of any unpaid debt, such as medical or utility bills sent to collections. Delinquencies remain a part of your credit history and can affect credit-related decisions for seven years.

 

In general, lenders or others who access your credit report determine your creditworthiness based on your past and current money behaviors. This includes the number and types of accounts you've opened, the length of time accounts have been open, and your payment history. When reviewing your credit report, lenders can also figure out if you're actively applying for credit from various sources.

 

Credit Bureaus Generate Your Report

 

Credit reporting agencies prepare credit reports. Experian, TransUnion, and Equifax are the major credit bureaus in the U.S. These companies gather information about your finances and debt to generate detailed reports.

 

Your credit scores are calculated based on the information contained in your credit reports.

 

The reports you receive from each bureau may not be identical, and this is because lenders may not report your accounts and payments to all three credit bureaus. So, it's essential to access and monitor your report from each of the three big credit agencies and verify the accuracy of your credit history.

 

Monitoring and Accessing Your Credit Report

 

You should watch your credit reports to identify any inaccurate information and promptly correct them. You can quickly find any transactions you've not made and protect yourself from identity theft by monitoring.

 

If you see this type of activity, you should contact the credit reporting agencies to freeze your credit before too much damage is caused.

 

Usually, you're legally entitled to a free copy of your credit report with each credit bureau once a year. But due to financial hardships and money concerns related to the COVID-19 pandemic, Experian, TransUnion, and Equifax allow consumers to access free weekly credit reports on AnnualCreditReport.com through December 31, 2022.

 

(Note: AnnualCreditReport.com is the only source for your free credit reports authorized by federal law. Many "look-alike" websites will charge you for the same information.)

 

You can order all three reports at once or choose to space them out every four months. Spacing them out throughout the year can help you identify any issues that might arise. You can order your free credit reports in the following ways:

  • Online at annualcreditreports.com
  • By phone at 1-877-322-8228
  • By mail by filling out the request form and mailing it to the following address:

Annual Credit Report Request Service

P.O. Box 105281

Atlanta, GA 30348-5281

couple high fiving about finances

Who Else Can Access Your Credit Report and Why?

 

The Fair Credit Reporting Act is a federal law that restricts who can access your credit report and the types of information consumer reporting agencies can collect, hold, and disseminate.

 

When you apply for credit, housing, credit cards, or loans, the application will likely include a section in which you agree to allow the prospective creditor to check your credit. This is known as a "hard" credit inquiry. Employers might also ask for permission to check your credit in states where doing so isn’t prohibited by state law.

 

If you've ever received a letter from a lender saying you're pre-approved for a credit card, they've performed a "soft" inquiry on your credit to decide whether you meet their lending requirements. However, a soft inquiry doesn't reveal too much information about your credit history.

 

What To Do If You Find an Error on Your Credit Report

If you find an error in your credit report, start by disputing it in writing with the credit reporting agency.

 

Explain why you believe the information is inaccurate and include copies of documents to support your claim. Identify each error by the listed account number and ask for the information to be corrected or removed.

 

You can also contact the company reporting the incorrect information to the credit agency. Once you file a dispute, the agency must confirm the information or remove it within 30 days.

 

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Credit Scores

 

Your credit score is calculated based on the information your credit report contains. The score consists of three digits used to provide an evaluation of your creditworthiness.

 

There are two main types of credit scoring models used, including FICO and VantageScore. However, more top lenders use FICO scores.

 

While the two main credit scoring models used include FICO and VantageScore, individual financial institutions and insurance companies also use proprietary algorithms.

 

Your FICO credit score will fall into a range from 300 to 850.

 

Scores under 580 are considered poor and well below the average score of U.S. consumers. Fair scores fall between 580 and 669, good scores between 670 and 739, and very good scores between 740 and 799—those with exceptional credit scores of 800 or higher.

 

The factors used to calculate your FICO score and the percentages of weight each element is given in the calculation include the following:

  • Payment history - 35%
  • Amounts owed - 30%
  • Length of credit - 15%
  • The mix of credit - 10%
  • New credit - 10%

Whenever you apply for a loan, credit card, or insurance, the company will check your credit score to determine the level of risk you pose to decide on extending credit or approving your policy.

 

Typically, when prospective creditors or lenders perform these "hard" inquiries, they can cause a temporary drop in your score.

 

Ways to Check Your Credit Score for Free and How Often

 

There are several ways you can check your credit score. First, inquire with your bank or credit union.

 

Most large lenders offer free credit scores as an account or credit card benefit. These include American Express, Bank of America, Capital One, Chase, Citi, Wells Fargo, USAA, and more. Unfortunately, hometown banks and your local credit union may not offer this as a feature on their accounts or products.

 

There are also online personal finance platforms offering free credit scores to users. These include Mint, Credit Karma, Credit Sesame, Bankrate, and NerdWallet.

 

Reasons To Keep Your Credit Score High

 

Once you obtain a high credit score, you should make sure to protect it.

 

Having great credit can help you receive the lowest interest rates on loans and credit cards, reduced premiums for your car insurance, and more.

 

When you have excellent credit, you can enjoy the following benefits:

  • Lower rates on your auto insurance
  • Lower rates on your homeowner or rental insurance
  • Lowest interest rates on your credit cards
  • Higher credit limit approvals, additional rewards, and benefits
  • More options for housing
  • Connecting utilities without having to pay large, upfront deposits
  • Approval for a smartphone without having to make a security deposit
  • Eligibility for security clearances
  • Looking better to prospective employers

If you allow your score to drop, it can take a long time to improve. By continuing to practice good financial decision-making, you can protect your credit score and enjoy the economic benefits of having excellent credit offers.

 

How To Raise Your Credit Score

 

If you learn that your credit is less than good, there are several ways you can work to improve it.

  1. Monitor your credit score often, and understand the factors used to calculate it.
  2. Watch your credit reports to find mistakes and dispute any errors you do find.
  3. Do not max out your credit cards. If you use all your available credit, your debt-to-income ratio will be too high and affect your credit. Strive to keep your debt-to-income ratio under 30%.
  4. Make all your payments on time.

What If You Have No Credit Score?

 

If you're a young adult, new to the country, or haven't used any credit in a long time, you might find out that you do not have a credit score. If you don't have a score, it will be harder to get credit. Prospective lenders want to see a history of paying any borrowed money back on time.

 

However, it's not impossible to get credit when you don't have a credit score.

 

For example, if you're a college student with a student loan, you can make timely payments on your loan after you leave school. Even better, you can make payments while you're still in school to save on interest you might be charged on the principal after you graduate.

 

You can also open a secured credit card or ask a parent to add you as an authorized user on one of their credit cards if they have good credit. As an authorized user, the payment activity on that card will appear on your credit report. You can also purchase a vehicle with a cosigner to start building your credit history.

 

You can also take out a secured loan from your bank. And ask your landlord and your utility companies to report a history of making on-time payments to the credit reporting agencies. Many property owners and utility companies only make reports when people do not pay on time.

 

No matter what you do, making every payment on time is the most critical.

couple counting money

Small Business Owners and Personal Credit Scores

 

If you're a small business owner, you should understand how your personal credit score impacts your ability to obtain financing for your business. Small business owners typically have both a business and personal credit profile, which can affect your ability to get a business loan.

 

When you have a personal credit score of less than 680, it will be difficult for you to obtain a business loan through a traditional lender. Banks generally want you to have a score of at least 700 before they consider approving your business for a loan.

 

The Small Business Administration might be willing to guarantee a small business loan to you if you have a personal credit score of at least 650 as long as you meet the agency's other requirements.

 

If your score is lower than 650, you'll likely have to look for a subprime lender. This means expect to pay higher interest rates and agree to other terms meant to reduce the lender's risks.

 

Credit Checks (Credit Inquiries)

 

When someone needs to check your financial history to decide the risk you pose as a borrower, they’ll perform a credit check (aka credit inquiry).

 

Examples of those legally authorized to complete a credit inquiry include financial institutions, utility providers, insurance companies, and employers. When you access your credit information, that is considered a credit check too.

 

Here is some information about each of these types of credit checks.

 

Hard Credit Checks

 

When you apply for a loan, lease, credit card, utility service, or insurance, you will likely be asked to provide consent to a credit check.

 

Once you agree, they'll be able to request a credit report and your credit score from one of the three major credit reporting agencies. This type of credit check, a hard inquiry, can temporarily cause your score to drop.

 

In addition to having a short-term negative impact on your credit score, hard inquiries stay on your credit report for two years. And numerous hard pulls of your credit (except for when "shopping for loans" during a narrow period) may signal that you're seeking money from a variety of sources. This boosts the concern that you're a high risk consumer.

 

While hard inquiries can cause a temporary drop in your credit score, the impact is much smaller than the other factors used to calculate your credit rating, such as past due payments. FICO only looks at hard inquiries occurring in the last 12-months, and a single hard inquiry should only affect your score by five points.

 

Soft Credit Inquiries

 

A soft check occurs when you check your credit or authorize a prospective employer to check it. Lenders are also allowed to complete a soft check without your permission to provide you with a pre-approved credit offer,

 

Soft credit checks don't hurt your credit score because you aren't applying for credit.

 

You should be able to see soft pulls in your credit history, from using a credit monitoring service, prequalifying for a credit offer, or allowing an employer to view your financial history. Still, they won't be visible to others.

 

Final Thoughts on Your Credit Info

You must understand how credit checks, credit reports, and credit scores relate to each other and affect your personal (and possibly business) finances.

 

Knowing your credit score and what your reports contain is one of the first steps to take for gaining control of your finances.

 

Continue reviewing your reports and your score regularly and act whenever you discover inaccuracies in your accounts or learn that your score is too low. By taking active steps to improve and protect your credit, you can enjoy all the benefits attaining good credit can offer.

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