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Whether you are in the market to buy a new home, purchase a car, or just open a line of credit, lenders will want to take a look at your credit score to help them make their decision. Financial institutions use a person’s credit score to determine how much risk is involved in loaning the person money.
If the risk is high, the creditor may deny the loan or charge higher interest rate. If you don’t know what your credit score is, you may want to find out what it is prior to making a big purchase so that you can get the best lending choices. In fact, it is a good idea to check your credit report annually to ensure everything is accurate because your credit report affects your score. Let’s delve into the differences between your credit score and your credit report to determine how your report impacts your score.
Who collects my information?
Credit Reporting Agencies (CRA) collect your information and provide it lenders upon request. The three main credit reporting agencies are TransUnion, Equifax, and Experian. Here is some of the information they gather:
- Your work history
- The names of all the creditors who have loaned you money
- The status of each account (open, closed, charged off, etc)
- The amount of money you owe each creditor
- How you pay your bills. They will look at whether you pay your creditors on time if you have you ever been late, and if you were late was it 30, 60, or 90+ days late
- Information about any delinquent accounts (current and past). It will also show if the amount is still owed or was charged off.
- Have you had any repossessions and if so, when and how much was owed on it at the time
- Have you ever filed for bankruptcy? If so, when were the debts discharged? A bankruptcy will have effect your credit but fades as time goes by.
- How much credit do you have access to versus how much are you using (credit/debt ratio)
- How much money do you owe
When you apply for a loan, you give the credit reporting agencies permission to perform a credit check on your name. They use your score to determine whether they will offer you a loan and what type of terms to offer you.
Credit score defined
Credit scores range from 300-850. Each of the credit agencies will give you a slightly different score because they weigh the variables differently. For example, Equifax may lower the score by two points if you have open several new accounts recently, whereas TransUnion may lower the score by five points. Either way, your score will be close across all three agencies. Different lenders use different reporting agencies to help them make their decision.
What is a good credit score?
Any score above 700 is considered good and scores nearing 800 or higher are in the excellent range. According to Experian, most consumers’ scores are within the 600-750 range. Scores that are 300-550 are very poor and if you have a score in this range, it may be difficult getting a loan. The exact breakdown of scores as reported by Experian are as follows:
- 300-579 Very Poor (17 % of people are in this category)
- 580-669 Fair (20.2 % of people are in this category)
- 670-739 Good (21.5 % of people have this score)
- 740-799 Very Good (18.2 % of people fall within this range)
- 800-850 Exceptional (19.9 % of people have this score)
If your score is in the very poor range, then you may need to pay a deposit before securing the loan. You also can expect to pay higher interest rates. People who have scores in the latter two categories can expect to get excellent interest rates and have access to with excellent scores are able to obtain greater loan amounts. Lenders view these individuals as a low risk for defaulting on the loan. It may benefit you to check out your credit score free of charge before you apply for a loan.
Credit report defined
Your credit report is different from your credit score because it doesn’t give you any numerical score. However, it does provide you with all the details of your credit history. These details form the basis of your credit score. That is why it’s important to make sure the information in the report is accurate. You can get a copy of your credit report free once a year by requesting one. Your credit report includes the following information:
- Identifying information such as name, address, phone number, social security number
- Employment history
- List of current open accounts
- Information about each of the accounts, such as how much you owe, if and when you were ever 30 days or more late, and the status of the accounts (open, closed, charged off)
- List of any delinquent accounts
- Information about any charge offs, repossessions, or bankruptcies
When you get your credit report, it’s important to review the details carefully to make sure it’s correct. You can dispute any information you find that is inaccurate. The best way to dispute an inaccuracy on your credit report is to send a letter to the credit reporting agency outlining the mistake(s). Make sure to include any documentation that backs up your claim such as receipts, statements, legal documents, bankruptcy papers, and so on.