When you apply for a credit card, apartment rental, mortgage or car loan, two metrics help prove your ability to pay off debt: your credit score and credit report. Although they measure similar things, understanding the differences can be confusing, especially if it’s your first time applying for a credit card.
It boils down to this: Your credit score, a simple number, is determined by the detailed information in your credit report. But let’s break it down further:
Credit Score
Your credit score is a single number lenders use to evaluate your credit worthiness. There are many different types of credit scores out there, but the most common is a FICO score, determined by the Fair Isaac Corporation using five factors:
- Payment history (35%): How often you miss payments and how late those payments are.
- Amounts owed (30%): The balance on all your credit accounts compared with your credit limit.
- Length of credit history (15%): The amount of time you’ve had credit accounts open. (This makes it difficult for people with little or no credit to have a high score.)
- New credit (10%): The number of new credit cards you’ve applied for recently. In general, a lot of new credit at once hurts your overall score, especially if you have a short credit history.
- Types of credit used (10%): The diversity of credit you have, between credit cards, loans and other accounts.
For better or worse, your score can fluctuate over time depending on your account activity. FICO scores range from 300 to 850. Scores above 720 are considered “excellent,” and scores above 690 are deemed “good.” If you have little or no credit history, you’ll have a lower score.
When you apply for a credit card or loan, the issuing bank will access your credit score to determine your eligibility. To check your own FICO score, purchase it on myfico.com.
Credit Report
Your credit report is an exhaustive list of your lines of credit and payment history, but it doesn’t contain your credit score. Three major agencies — Equifax, Experian and TransUnion — compile credit reports. Several pages long, they detail all the accounts you’ve ever opened or closed, loans you’ve taken out, and how diligently you paid off outstanding balances. Finally, if you’ve ever been sued or filed for bankruptcy, that will appear on your credit report too.
Like with a credit score, if you don’t have credit, your report will be sparse at best. It’s important to establish credit because lenders, landlords, insurers and employers use credit reports to holistically evaluate your borrowing history and determine applicants’ eligibility for loans, credit cards, rentals, insurance policies and jobs.
Everyone’s legally entitled to one free credit report per year from each of the three major agencies. You can order these reports from http://1.usa.gov/1nbIDEH. They sometimes contain errors, so it’s important to examine them carefully and dispute any mistakes you find with the credit bureau that issued the report.
Good credit scores and credit reports are key to accessing financial products. If you spend responsibly, pay off balances and are careful about opening new accounts, you’ll be well on your way to having healthy credit and the documentation to back it up.
Woman with credit report image via Shutterstock.
The post Credit Score vs. Credit Report: What’s the Difference? appeared first on NerdWallet Credit Card Blog.
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