It seems like now, more than ever, people are obsessed with their credit scores. Don’t get me wrong; you certainly want to maintain good credit, but understand that all sorts of new services and products have been introduced to monetize this nascent business.

Whether it’s helping a client refinance a mortgage, lease a new car, consolidate school loans, or secure a line of credit for a business, we have discussions about credit scores regularly.

Have you ever noticed that your credit score can differ across the systems calculating it? As you’ll come to find out, not all credit scores are created equal. In fact, credit scores are calculated in a multitude of ways and are largely dependent on the type of credit being applied for. On top of that, there are different sources providing the information that goes into calculating your credit score.

So here’s what you need to know about credit scores and, more importantly, your credit reports.

What is a Credit Report?

A credit report is a collection of numerous data points, gathered from your unique list of lenders and creditors over time. This data, also referred to as your “credit history”, reveals exactly how and what you’ve borrowed, spent, and repaid (or not) over time.

On a credit report there are lines of reporting called “tradelines”. Tradelines are entries from each of your creditors showing how much credit they’ve extended to you. For example, if you have two separate credit cards plus an automobile loan, this information would be presented on three separate trade lines. Take it a step further, if you pay off the automobile loan, the trade line will still exist, to your benefit, and be marked as paid in full.

Credit reports also provide historical information on past balances as well as information on how much you currently owe and repayment habits. More recently, recurring payments for items like rent have found their way onto credit reports too.

How to Get Your Credit Report

There are three separate credit reporting agencies which we’ll mention in a moment. To help protect consumers, the federal government established regulations around fair consumer credit reporting practices. These guidelines provide everyone with a free copy of their credit report each year. You may request this annual report, for FREE, from each of the three credit reporting agencies once every year. These agencies are:

Equifax

Experian

TransUnion

Some people prefer to access their credit reports all at once. Others like to review them separately at different times throughout the year. If you choose to view them at different times, consider checking one every four months. This will give you a “rolling” view of this information throughout the year.

Think of these reports as the story of your credit life. Monitoring these reports on a regular basis will assure they’re telling the truth about your financial behavior. To learn more about accessing your free credit report, visit the Federal Trade Commission’s website. Don’t be fooled into thinking you have to use a third-party vendor, pay or sign up for a separate service to retrieve your credit reports.

What is a Credit Score?

Credit scores are calculated differently based on the type of credit you’re applying for, such as credit cards or mortgages. Despite these variations, all credit scores use information from your credit report, with the FICO score being the most recognized method.

Credit scores range from 300 to 850 and summarize your creditworthiness. A score of 720 or higher is ideal, as it increases your chances of receiving credit on favorable terms. If your score is low, you might need a co-signer to qualify for credit.

Your credit score can vary across different credit reporting agencies. If there are significant differences, review the credit report with the lowest score to check for errors. If you find any inaccuracies, contact the reporting agency and follow their dispute resolution process.

While you can get a free copy of your credit report annually, accessing your credit score might incur a cost. Sometimes, a “free” credit score is included as a perk with another product, but usually, businesses offering these services aim to make money, potentially using your personal information.

However, when applying for credit, a lender might cover these charges. Don’t hesitate to ask lenders where they source your credit score and if there’s a cost involved. A financial advisor can also help you determine the best way to access your credit score and report.

To get the best view of your creditworthiness, especially when applying for a loan or mortgage, focus on your credit reports. Reviewing these with a financial planner ensures that your credit reports and scores accurately reflect your financial habits. Your credit report provides a comprehensive view, while your credit score offers a quick snapshot. Both are important, but your credit report holds more detailed information.

Credit Report vs. Credit Score

Understanding the difference between your credit score and credit report is crucial for managing your financial health. Here’s a quick and easy breakdown:

Credit Report:

• What it is: A detailed history of your credit activity, compiled from data provided by your lenders and creditors.
• What’s included: Information about every credit account you’ve had, including credit cards, loans, and payment histories, as well as any past balances, current amounts owed, and repayment habits.
• Purpose: Think of it as the story of your credit life, showing lenders how you’ve managed your debts over time.

Credit Score:

• What it is: A numerical representation of your creditworthiness, typically ranging from 300 to 850.
• What’s included: Calculated from the information in your credit report, but distilled into a single number that gives lenders a quick snapshot of your credit health.
• Purpose: Used by lenders to assess the risk of lending you money. Higher scores indicate lower risk.

Key Differences:

• Detail vs. Summary: Your credit report is detailed and comprehensive, while your credit score is a simplified numerical summary.
• Multiple Scores: You have multiple credit scores, which can vary depending on the scoring model and the type of credit you’re applying for.
• Annual Access: You can get a free copy of your credit report annually from each of the three major credit bureaus, but accessing your credit score might come with a cost or be part of another service.

Understanding these differences helps you better manage your financial health. If you’re looking for guidance, Navalign Wealth Partners can assist you in creating a financial plan that ensures both your credit reports and scores reflect your true financial behavior.

Contact Navalign Wealth Partners today to get started on securing your financial future.