When you apply for a credit card, apartment rental, mortgage, or car loan, two things help potential lenders assess the likelihood of you paying as agreed: your credit scores and your credit reports.
Your credit reports contain detailed information about your past use of credit. This data is then calculated into a simple number representing your creditworthiness – a credit score.
Think of reports as a medical record, which lists facts such as symptoms and test results, and scores as the resulting diagnosis. Good credit scores are essential for accessing financial products. Let’s break it down:
A credit score is a number that lenders use to assess your level of security or risk as a customer. The most common type used for making credit decisions is the FICO score, which comes in several versions, many of which are specialized notes for products such as car loans or credit cards. competitor of FICO, VantageScore, is also used in loan decisions. (You can get a free credit score of VantageScore weekly on the NerdWallet site.)
All credit scores are derived from information contained in your credit reports. The most important factors are:
Your scores will vary depending on your account activity. VantageScore and most versions of FICO range from 300 to 850. Scores of 690 or higher are considered “good” and those of 720 or higher are considered “excellent”. Both scoring models look at the same factors, so if you score well on one you will likely score well on the other.
When you apply for a credit card or loan, the lender checks your credit rating to determine your eligibility. It’s a good idea to monitor your score yourself so that you get an idea of how a lender might rate you. This can be particularly useful if you are looking to build your credit.
Just use the same version of the same score each time. It’s like weighing yourself; using the same scale each time eliminates slight variations due to the equipment.
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Your credit reports give a complete list of your lines of credit and payment history, but they do not include your credit score. Three major credit reporting companies – Equifax, Experian and TransUnion – compile the reports.
Credit reports often stretch over many pages as they detail your accounts and how diligently you paid off outstanding balances. Negative information such as repossessions or bankruptcies will also show up on your credit report.
If you’ve never had credit accounts, you probably don’t have a credit report yet. It is important to establish a credit history because credit reports can be used to determine candidate eligibility for loans, credit cards, rentals, insurance policies and jobs.
Reports sometimes contain errors, so it is important to review them carefully and dispute any error you are with the company that issued the report. Everyone is entitled to free credit reports from each of the three credit reporting companies. Until April 2022, consumers have free weekly access through using AnnualCreditReport.com.