Although
many people mistakenly use the terms interchangeably, your credit report and your
credit score are NOT the same thing. Understanding the differences will help you
establish and maintain a healthy credit history over time. Here's what you need
to know about credit reports vs. credit scores:
Your Credit
Report
Every
time you use credit or borrow money, a file is generated by the three major credit
reporting agencies: Equifax, Experian and TransUnion. Details are collected
and organized to reflect how you manage your finances and will include bank loans,
credit cards, checking and debit card activities. Your credit report will show
all your active accounts as well as closed and inactive accounts. Bankruptcies,
foreclosures, tax issues, court actions and liens will also be included.
The
importance of your report cannot be understated. Lenders base their decision to
loan you money on the outcome of your credit report. The interest rates and terms
you'll be offered when applying for a home mortgage, car loan or credit card are
ultimately tied to this report and what it reflects about your financial behavior.
Your Credit Score
Your
credit report is used to determine your credit score. In the same way that the
grades you earned in high school determined your grade point average, your credit
score is a compilation of points based on your credit report resulting in a 3-digit
value which is your credit score.
Just as the student with the highest grade point average
is accepted at the best colleges and universities, the higher your credit score
the better the interest rate and terms when you go to borrow money. The closer
you get to the magic number of 850 the better. You may have to pay higher interest
rates and have difficulty getting a loan, if your score falls below 500.
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