Many American consumers are unaware that there’s a difference between their credit report and their credit score. There is a big difference however, and it helps to know what the difference is.
Simply put, your credit report is a track record of all of the payments that you’ve made, your “payment history”, without any judgment whatsoever.
On the other hand, your credit score is much like the GPA you had in high school or college. What it does is measure your success cumulatively against other consumers, and takes note of whether you’re “credit-worthy” or not in comparison to them.
Depending on the bracket that your credit score falls into, lenders will assign an interest rate when you go to purchase a new car or get a mortgage for a new home. Credit scores are used by banks alone however and, more and more, you’ll find that landlords, insurance firms and even employers are using this score as a way to figure out if the person they’re dealing with is a responsible consumer.
Of all of the scores out there, the FICO score is the most widely used and ranges from 300 to 850, with a higher number indicating a better score. A consumer that has a FICO score of 740 or higher is considered “excellent” and will typically qualify for the best interest rates. Fall below 650 however and, when you apply for loans and credit cards, your interest rates will typically be quite high. In some cases, you might not qualify at all, depending on how low your credit score actually is.
It’s also important to note that a difference of only 20 points can make a very big difference in the interest rate that you’ll receive. For example, a consumer with a credit score of 659 would likely be able to qualify for a 30-year mortgage at 5.3% with today’s interest rates. If that same person had a score of 680 however, he or she would most likely qualify for a 4.7% interest rate for the same loan, which is nearly $1000 less per year in interest or, over the 30 year life of the mortgage, approximately $30,000.
Your credit report is the basis for your credit score and Fair Isaac, the company that produces the FICO score, is not exactly willing to tell consumers how they calculate those scores. However, they do give a certain “weight” to a number of different criteria, including payment history at 35%, amount of money owed at 30%, length of credit history at 15%, and 10% for both new credit and types of credit used.
Payment history, the most important factor at 35%, is basically a record of your bills and whether or not you’ve paid them on time. When it comes to the amount of money you owe, things get a bit more complicated. This involves something called your “utilization ratio”, which is the amount of credit you’re actually using as opposed to the total amount of credit lenders make available to you.
Typically, consumers who are closer to being at the maximum of their credit limit fall out of favor with lenders, who believe that they’re more likely to start missing payments.
The length of history, at 15%, is determined simply by the average age of all the credit accounts that you own, as well as the time factor since you use those accounts.
Finally, new credit accounts and types of credit used, the smallest factors, look at how many accounts that you have opened at the same time (opening too many will hurt your credit score) and what type of “mix” of credit that you have, including things like student loans, your mortgage, car loans and credit loans, respectively.
Lenders look at these to be sure that you’re a consumer that can handle several different types of credit accounts responsibly.
