What is The Connection Between Credit Score and Credit Report?

Your credit report documents your transactions managing debts, whereas a credit score is calculated using your credit report. The three-digit number is a representation of the likelihood of debt repayment. The connection between credit score and credit report is assessed by lenders and creditors when deciding whether you are a good or bad credit risk.

What is a Credit Report?

A credit report is a collection of your debt handling record and is put together by one or all of the three major credit bureaus; Equifax, Experian, and TransUnion. It is a statistical representation of consumer borrowing debts using lines of credit and loans and how responsibly they pay back the money borrowed. 

A user’s payment history reflects whether the payments were made timely, as agreed in the loan agreement, and if they were late payments. Details such as debt payment, monthly payment records for currently active credit cards and loans, as well as loans that have been paid off are listed in a credit report.

Bankruptcy, delinquent accounts, collection accounts, repossession, or foreclosure are additional factors reflected in your credit report.

What is a Credit Score?

A credit score is a statistical representation used by creditors to help decipher whether you are likely to pay back a loan on time if issued a credit card or personal loan. A credit scoring model calculates the three-digit credit score by evaluating your credit report record and history.

Out of the many credit scoring models, the most frequently used ones are; the VantageScore and the Fico Score, which range from 300 to 850. Lending institutions consider those with high credit scores a good credit risk and those with low scores a bad credit risk as they are more likely to default on a payment.

What makes a Good FICO^® Score?

FICO has various types of credit scores for consumers. The company has “base” FICO scores for issuers across numerous industries and sector-wide scores for credit card companies and car loan lenders.

A “good” range for base FICO scores is defined between 670 – 739, with the base range varying from 300 – to 850. The base industry-specific FICO credit scores range from 250 to 900.

What makes a Good VantageScore?

The first two credit scoring models for VantageScore range from 501 to 990, whereas the latest VantageScore models (3.0 & 4.0) range between 300 to 800. A “good” range for the newest models is 661 – 780.

What Factors Affect Credit Score?

Frequent factors affecting your credit score are listed below:

• Timely payments: Making payments on time helps with your credit score, but failing to do so can result in a poor score as you may be declared bankrupt or your account may be sent to collections.
  
• Credit utilization: Factors such as account balance, the amount owed, and your credit limit play an important part in determining how much credit is used.
  
• The period of credit history includes the average period of all your credit accounts, varying from the newest to the oldest accounts.
  
• Account types: This is frequently known as the “credit mix,” which assesses your management of installment accounts (auto loans, mortgages, and personal loans) and revolving accounts (credit cards).
  
• Latest activity: Your recent activity is inspected, such as opening new accounts or applying to open a new account.

VantageScore and FICO use different outlooks to explain the importance of the various factors affecting the credit score.

FICO^® Score Factors

The FICO scoring model makes use of percentages to depict the importance of each factor in the following order:

• History of payments: 35%
  
• Amounts borrowed: 30%
  
• Duration of credit history: 15%
  
• Credit mix: 10%
  
• Recent credit: 10%

VantageScore Factors

The VantageScore model categorizes factors by how impactful they may be to your credit score in the following order:

• Complete credit utilization, account balance, and credit at hand: Extremely dominant.
  
• Account types (credit mix): Highly impactful.
  
• History of payment: Somewhat influential.
  
• Credit history age: Less influential.
  
• New accounts and latest activity: Barely influential.
  

Note that FICO and Vantage scoring models do not consider soft inquiries when calculating your credit score as they do not affect the score. Other credit reporting companies like Experian make these soft inquiries for promotional offers or occasional reviews of credit accounts. 

The occurrence of negative entries in your credit report, such as bankruptcy, repossession, or foreclosure, can damage your credit score and pull it down significantly. 

Lenders will charge those with a low credit score a higher interest rate because they are more likely to default on a loan payment which in turn will cost the lender more in terms of loss-recovery efforts. Creditors offer applicants with exceptional credit scores the lowest possible interest rates.

Who Views Your Credit Score and Credit Report?

Creditors and lenders carry out credit checks; however, it may also be done when landlords, employers, or insurance companies want to view your credit history. Employers and landlords must officially notify you and conduct credit checks after they have been granted permission.

As per federal law, your credit report can only be accessed and viewed by authorized agencies with your permission. 

Applications processed in order to be granted a loan or new lines of credit include permission given to lenders to acquire credit scores and reports in the borrower-screening procedure. According to cardholder agreements, permission is given to credit card issuers to keep an eye on your credit score and activities if your account is active.

How to Obtain Your Credit Report and Score

A free-of-charge replica of your credit report can be attained every 12 months as per the FCRA and Federal Trade Commission. It is advised by the FTC to review your credit report annually to avoid hard inquiries and identity theft or fraudulent activities. You can get a copy of your report from the three major credit bureaus; Experian, Equifax, and TransUnion, or at annualcreditreport.com. 

Regular checks on your credit report represent your current financial standing as well as where you stand in the eyes of potential creditors. It should be noted that credit scores are not included in credit reports; however, a free credit report and FICO Scores copy can be obtained from Experian. 

If your credit report reflects responsible utilization and good credit habits, your credit score will rise with time.

Conclusion

Credit scores and details in your credit report directly affect lenders’ decisions to issue you a loan or new line of credit, but this isn’t the only reason to attain a good credit score. A low credit score will make you a bad credit risk in the eyes of insurance companies, employers, and landlords, which means paying a high-security deposit and less for auto insurance.

Due to the significant connection between credit score and credit report, creditors usually prioritize them while reviewing credit and loan applications. Every lender has their set standard of a minimum or cut-off credit score and will not prefer to do business with candidates whose scores are below a specified range.