When the issue of credit comes up, it is not uncommon to become a little confused at the diference between a credit report and a credit score. However, knowing the difference between the two, and understanding how they are related, is essential if you want to stay on top of your credit situation.
Your credit report is a record of all of your credit-related dealings. Each loan that you have had is listed on your credit report. Often, you can even find information on whether or not you have made payments late, as well as what your current balance is. Creditors regularly report to the credit bureaus, who then compile your history into a report that other creditors can look at.
Before you are approved for a loan, a creditor might want to see how you have handled credit in the past. Your credit report (which is also sometimes called your credit history) provides this information. If you have a history of late and missed payments, a lender might be worried about letting you borrow money. You might be charged a higher interest rate, or even denied credit altogether.
Over time, your credit report grows as you use more credit. Because a credit report can become large and difficult to look though, a system was devised to represent all of the information in your credit report as a three-digit number.
The Fair Isaac Company — you might recognize the company through the FICO score — developed an algorithm designed to take the information in your credit report and turn it into a number. Credit scoring was born. All of the information in your credit report is taken into account and then plugged into FICO’s scoring model. What comes out allows creditors to see, in a single glance, your credit history.
While the FICO score is the most popular model in use, there are other scoring models as well. Each of the three major credit bureaus features its own scoring model, some of the based on FICO’s model. Even FICO offers slightly different models to different types of lenders. A mortgage lender might use a version of the FICO score that is weighted in items most important to paying a home loan. Banks even have their own scoring models that they use in order to determine whether your credit score matches their idea of an ideal customer.
Completely different scoring models have been developed as well. One of the major alternatives to the FICO score is the VantageScore, which was developed by the three major credit bureaus. Experian has its PLUS score, and there are companies like eCredable that offer their own alternative scoring methods that don’t rely entirely on credit.
What matters, though, is that most credit scoring models are built based on the information in your credit report. If you want to have a good credit score, you need to make sure that the information in your credit report is positive and accurate. This means checking your credit report regularly to catch mistakes, as well as engaging in positive credit habits like making your payments on time and reducing your debt.