A credit report is a compilation of bits of data that are constantly being reported by your unique list of lenders and creditors. This data reveals exactly how you borrow, spend and repay debts. On a credit report, in addition to some basic identifying information, there are lines of reporting, called “trade lines.” These trade lines are entries from each of your creditors showing how much credit they’ve extended to you, how much you currently owe, specific information about your monthly repayment habits and much more. (For more, see: How to Use Your Credit and Debit Card Safely.)
Credit Reporting Agencies
To help protect consumers, the federal government created regulations which entitle everyone to a free copy of their credit report annually from each of the three credit reporting agencies:
Some people prefer to access their credit reports all at once, while others like to review them separately. If you choose to view them at different times, consider checking one every four months to have a “rolling” view of this information throughout the year. After all, it’s the story of your credit life – be sure it’s telling the truth and not a fictional tale about your financial behavior.
But what about your credit score? Your credit score takes all of the information from your credit report and assigns a number between 300 to 850. Creditors can then use this information to more easily assess your overall credit worthiness. It’s quite common that you’ll have a slightly different credit score from each of the credit reporting agencies. If your credit score differs significantly, you’ll want to pay closer attention to the one with an obviously different number, to determine if there is false information or errors. (For more, see: 3 Crucial Tips for Living Within Your Means.)
According to many experts, there are hundreds of algorithms designed to give creditors their desired look at your financial information. FICO is arguably the most recognized method of credit scoring. However, an insurance company may use their own measure while a car dealer (and its lenders) prefers another method.
While a copy of your credit report is provided free on an annual basis, remember that access to your credit scores is not necessarily free. In some cases, a “free” credit score may be offered as a perk or as part of another product offer. But in most cases, businesses that work in this arena are there to make money, so expect to pay something in order to get your score. There are a few exceptions, but be aware and don’t be afraid to ask your lenders and creditors about their sources for credit scoring.
So which of these is your best view of your overall creditworthiness? Well, if you’re getting ready to apply for a loan or mortgage, your credit reports are the key. You’ll want to check your credit reports on a regular basis to ensure what’s being recorded about your debt management habits is correct and reflects the most positive story about your life as a consumer. Since your credit score is just a numerical assessment based upon certain information contained in your credit report, it won’t really give you the full picture. Both are great to know, but your credit report will always trump your credit score. (For related reading, see: The Importance of Personal Finance Knowledge.)