You probably have heard the terms “credit report” and “credit score”, but do you know that there is a difference between the two?
Your credit report contains information and details about your credit history. There are three major credit bureaus: Experian, Equifax and TransUnion. These companies receive information from lenders, creditors (such as utility companies) and landlords. The credit bureaus then compile a report, or a snapshot, of your financial history, including what types of credit you have, when you opened each loan, the balances on your credit cards and auto loans, and whether you pay your bills on time, have accounts in collection, have filed bankruptcy or have court judgments against you.
Your credit score, on the other hand, is a three-digit number that is made up of the information contained in your credit report. The credit bureaus mentioned above apply a complex mathematical formula to the information in your credit report, in order to compute your credit score. The purpose of this score is to give potential lenders an idea of how much of a financial risk you are. The higher your credit score, the less likely you are to pay loans late or to stop making payments all together. The factors that will affect your credit score include:
1) Your payment history (do you make your loan payments on time);
2) The amount you owe on your loans;
3) The length of your credit history;
4) The type of accounts you have (credit cards, mortgage loans, auto loans, etc.); and
5) How much “new” or recent credit you have opened (don’t open five new credit cards
in one month, it will lower your score!).
While the credit bureaus do try to keep your credit report accurate, errors do happen. Because of this, it is important to check your credit report at least once a year. In fact, you are entitled to receive one free credit report from each of the credit bureaus once per year: just visit www.annualcreditreport.com to receive your free credit reports. You can order these reports from other sites, but they will charge you. Check your credit report closely for errors, because these factors determine your credit score and you want that to be accurate as well.
Credit reports and their effect on your financial life can be confusing. If you want help or more information, call Mountain View Law Group at (801) 393-5555 for a free consultation. We can explain what happens with credit reports and credit scores, and give you advice on how to keep your credit report accurate.