Credit 101

Credit Reports vs. Credit Scores: What’s the Difference?

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The credit experts at Credit.com write frequently about the importance of consumers understanding credit reports and credit scores. And for good reason, as the better your credit report, the better your credit score; and the better the credit terms that will be available to you, whether a mortgage, auto loan, or credit card.

Yahoo! Analytics recently provided us Internet search statistics that indicate many consumers also place a high value on this information. The latest search trends show an increasing desire for free credit reports and scores — not just the “credit reports” and “credit score” search terms we’re used to seeing. While, no doubt, much of the “credit” for this awareness of free credit reports and scores goes to the often-inescapable TV ads, we have also seen a general increase in awareness among consumers that, like it or not, a good credit rating is an important factor in maintaining a positive lifestyle.

Are Credit Scores Taking a Backseat?

The last time we wrote about these Yahoo! Analytics search statistics, there were more searches for “credit score” (58%) than “credit report” (42%). Today, we see a reversal of that trend, as “credit report” now receives twice as many search requests as “credit score” — with searches for “free credit report” receiving five times as many requests as “credit report.”

Does this mean that consumers are now more interested in credit reports than scores? And free credit reports at that? While it’s hard to conclude too much based on these numbers alone, we’d like to think people are getting the message that there are many different flavors of credit scores available to consumers. Most of the credit scores consumers receive aren’t used by lenders, and all credit scores rely on underlying credit information stored at the three national credit bureaus: Equifax, Experian and TransUnion. And, as such, more and more consumers are finding that it makes much more sense to monitor the accuracy of the credit reports used by these scoring systems than to obsess over whether they’re getting a credit score that lenders use — and that the credit score is accurate.

Not only are all scores in the marketplace today based on credit information from the big three credit bureaus, but all scores tend to consider such credit report information in the same ways, for example:

Payment history

Payments made on time contribute positively to all scores, with late payments indicating increased risk (lower score), and recently late payments indicating even higher risk than older negative marks.

Outstanding debt

Compared to installment type debt — mortgage, auto and student loan balances — revolving debt (credit cards) tends to be a stronger risk predictor within all of the scoring formulas, as shown in the various “credit utilization” (card balance/limit ratio) and other debt-measuring calculations.

Length of Credit History

How long a consumer has been using credit plays a role in all scores, with longer credit track records typically leading to higher scores.

New credit

All credit scoring models consider newly acquired credit to be somewhat of a risk factor, with newly opened accounts often depressing a score when first appearing on a credit report.

Credit mix

Demonstrating the ability to manage different types of credit — cards and loans, for example — is always treated positively, compared with credit reports containing just one type of credit.

In a perfect world, consumers would be able to get credit reports from all three credit bureaus on an unlimited basis, along with all of the various credit scores lenders might ever use in a lending decision — for free. But all we really need to know to ensure that the best credit terms will continue to be available to us when we need them is that:

  • We’re managing our credit accounts responsibly by paying on time, keeping our credit card debt low, and applying for new credit only when needed; and that
  • Our credit reports at the three credit bureaus are accurate reflections of our credit history.

When searching online for those free credit reports and scores, first, be aware that we are all entitled to one free credit report — though not credit scores — each year from each of the three national credit reporting agencies at the AnnualCreditReport.com website. Second, when it comes to the free scores, check out some of the free monthly credit monitoring services, such as Credit.com’s free Credit Report Card, as a convenient way to keep tabs on your credit reports and scores, remembering that an accurate credit report is the surest way to an accurate credit score.

Related Article: How do I get my free annual credit report?

Image: iStockphoto

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  • http://Fitzsimmons Colin P Fitzsimmons

    Credit scoring in it’s present form is ridiculous..Banks responsible for the market crash and then bailed out didn’t have their access to “credit” hurt but the working man who suffered bad credit from loss of work, etc. have bad credit and is slowing the recovery. There should be a credit forgivness for the period after the crash and their credit returned to the precrash credit score.

    • Barry Paperno

      Hi Colin, I’ve had to do some thinking about what you’re saying and have had to re-read it a few times, as each time I read different things into it. I’m glad I did. Otherwise you would have had to suffer from the conventional reply explaining that scores don’t look at employment, etc., when you’re not saying anything to indicate you don’t know that. You’re just saying something about how it SHOULD be. So that being the case, I couldn’t agree more. And from a scoring industry perspective I wonder how sure we should be that the best predictive data are being used to predict risk for a population that includes unemployed, etc? I’m not saying they’re not, just saying it’s a good question. I can easily see a “one-time adjustment,” such as the forgiveness you suggest, stimulating the consumer-driven economy. And if it doesn’t do that, well I mean what’s the worst that could happen? A millions of consumers bailed out to the tune of billions of dollars? -Barry

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  • Patricia Evans

    I recently applied for a refi, I pay for a service to get access to my credit report and score. Once a year I can get all 3. So I did that and sent that to the mortgage company. It was approx 30 days old. My score was like 740 or 720, can’t remember now but he did one and it came back 680. He said consumer are different than the ones banks get. Is this true? If so why?

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  • http://www.credit.com/ Credit.com Credit Experts

    Dane — The older the information gets, the less impact it will have. From a credit scoring perspective, the most recent 24 months are where it hurts the most. That’s not to say that you’ll see an significant increase in your scores, just that these particular negatives aren’t as damaging as they were a year or two years ago. However, it’s also important to understand that what’s also hurting you here is the fact that there are seven accounts (rather than just one), so that’s another factor to keep in mind. When looking at negative payment or derogatory information, credit scores look at three key factors: severity (a 30-60 day late is much less severe than a collection, for example), recency (a collection from 5 years ago isn’t nearly as damaging as a collection that just occurred within the last year or two), and frequency (or the number of late payments, collections, etc. In which case, there’s a big difference between one collection and seven._

    We’d be remiss if we didn’t also address how important it is to understand that if you don’t address these collections, they can often turn into judgements if the creditor decides to sue for payment… so it’s something to at least be aware of. If they sue, and are able to file judgments against you, the judgments will do even more damage — and unlike collections, the statute of limitations on judgments can often span 10-20 years. Plus, they can often be renewed. If you receive a summons at some point down the road, it’d be a good idea to book mark the following resource so that you know how best to handle the lawsuit:

    Seven Ways to Defend a Debt Collection Lawsuit

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