We throw the terms Credit Report and Credit Score around as if they were the same thing. “How can I fix my Credit Score” and “Companies look at Credit Scores for job applicants” are both incorrect statements because they are only looking at one measurement of the overall picture – the overall picture being your Credit Report.
What a Credit Report is
A record of all your current or closed accounts (within the past few years) and any bad debts. Essentially, this is a big list of your financial history as it pertains to debt.
What a Credit Report shows
There is a lot of information offered in your individual Credit Report. The following is a list of the most common things you will see on any of the reports offered by the main three reporting agencies (Equifax, Experian, and TransUnion):
- Account names and numbers
- Type of account (Mortgages, Installment, Revolving, other)
- Date the account was opened
- Balance (to the month, may not be to the date)
- The last day the creditor reported your account data
- Credit Limit
- Past due
- Date closed
- Payment History/Late pays
What a traditional Credit Score is
Each of the three major reporting agencies generate their own Credit Score based upon your Credit Report. In other words, they all pull the data from FICO and give you a 3-digit number.
What a traditional Credit Score does
You don’t use your Credit Score, financial services do. It is a very quick and cheap way for a lender to evaluate you. A car dealership may pull your Credit Score while you are taking a test drive and find out “how much car they can put you into”, a credit card company will send you pre-approved applications or “convenience checks” for balance transfers to their card, and banks will send you information about home equity lines of credit for that vacation or home remodel.
Which is more important: Credit Report or Credit Score?
A Credit Score is based on the items and information contained in a Credit Report, so a Credit Report is more important than a Credit Score. You could say that “A Credit Score is a sub-set of a Credit Report, but a Credit Report can not be a sub-set of a Credit Score“.
How much time should I spend working on my Credit Report?
You can review your Credit Report for free every year if you use the approved site AnnualCreditReport.com. From there you can pull a Credit Report from each of the three reporting agencies. The amount of time it takes to retrieve your report only takes about 5 minutes and reviewing your report can take up to 30 minutes, unless there are errors you need to have corrected. If you were to pull your Credit Report from one of the three companies in April, another in August, and the final in December then you would only spend about 1/2 hour every 4 months.
How much time should I spend working on my Credit Score?
If your goal is to have the highest score possible then you will spend a lot of time and money on “Building your FICO Score“. Consider this: If you don’t max out your credit cards, don’t take out a lot of loans, and pay all of your bills on time then you have already influenced your Credit Score in a positive way. Think of all the extraneous time spent searching the internet for articles or unnecessary accounts opened to try and create ways to improve an already healthy payment history.
A Credit Score is based only on debt
If there is one thing I would like you to take away from reading this article: A Credit Score reflects your payment history on debt only. Your time would be better spent balancing your checkbook, searching for loose change in the seats of your car, or being on hold while canceling that subscription to a magazine you no longer need than to be researching various ways to “maximize your utilization rate” or use your hard-earned money to see what your Credit Score is. Instead: Be responsible with your money, be purposeful with your spending, and build wealth – not credit!