Which would you choose if you had to choose between disclosing your weight and your credit score to the entire world? If you’re like 70% of Americans, you’d prefer to keep your credit score private.
It’s no surprise: the world of credit ratings is perplexing and riddled with misinformation. As a result, what you think is helpful for your credit may work against it, and vice versa. That is why understanding how credit scores function is critical if you desire a solid credit score that will save you money over time.
What Exactly Is a Credit Score?
If you want to borrow money, create a utility account, or rent an apartment, you’re asking someone to believe in your capacity to pay your expenses on time. On the other hand, Lenders and landlords can’t phone up every credit card issuer you’ve had since sophomore year and ask if you’re good with money. Instead, they’ll check your credit report.
If you had to sum up your entire financial life in one number, it would be your credit score. It’s a three-digit number that indicates your borrowing and repayment history. Creditors believe you to be more trustworthy if you have a higher score.
Although you may chuckle at the thought of reducing your borrowing history to a single arbitrary number, creditors take it very seriously. A low credit score may entail paying exorbitant interest rates on credit cards and loans (assuming you’re authorized at all). To open an electrical or cell phone account, you may be required to pay a deposit. And what about that ideal apartment you applied for? Instead, the landlord may give a tenant with higher credit the keys.
On the other hand, a high credit score entitles you to borrow money at the lowest possible interest rate. So you don’t have to be concerned about losing out or having to pay more because you look financially reckless.
Credit Report vs. Credit Score
Despite their close relationship, a credit report and a credit score are not the same things.
Experian, Equifax, and TransUnion are the three major credit bureaus that collect your personal and financial information and assemble it into your credit report. Personal identifying information such as your name, address, and Social Security number, as well as open and closed credit card accounts, loans, invoices in collections, liens, and bankruptcies, are all detailed in credit reports. In addition, every year, you are entitled to a free credit report from each of the three main bureaus through AnnualCreditReport.com, the only federally recognized site that provides free credit reports.
Credit bureaus will calculate a credit score based on the information in your credit reports, which will then be shared with banks, lenders, and other organizations. And, sure, you have more than one credit report and credit score because there are many credit bureaus.