Understanding How Your Credit Report and Credit Scores Work

credit score, credit report

​Are you planning to make a major purchase like buy​ing a home or a car? Maybe you want to ​renovate ​your home, buy new furniture, add ​extra rooms or upgrade electronics and appliances.  

If paying cash is not an option, ​​take a moment to look at your credit score before attempting to secure a loan or credit card.  

The goal is to obtain the lowest possible interest rate, ​and reduce the amount you will pay for those big ticket items.  

​Consider using a service like​ Identity Guard to monitor your score.  ​This service provides many free tools that can get you on the right financial path.

This post will show you how using online financial tools​, paired with understanding your credit report can be the combination you need to save money, improve your​ finances, and stay on track over time.  

The Difference Between Credit Scores ​and Credit Reports

There is a difference between your credit score and your credit report.  Your credit report is a compilation of your credit related activities. And your credit score (also referred to as your FICO score) is a formula that lenders use to determine how you manage financial responsibility.  Credit scores range between 300 and 850. The higher your score, the better. 

Information from your credit report is used to calculate your credit score. So paying on time, paying off delinquencies and removing inaccuracies from your report helps to improve your score.

​FICO stands for Fair Isaac Corporation​, which ​is a leading analytics software company.  They provide the ​software used by lenders to calculate ​consumer credit scores.

​Using online financial tools (especially those like Credit Sesame, that offer mobile apps) can help you monitor your credit report for outstanding balances,  Having your credit data as close as you cell phone, tablet or desktop computer can keep you in touch with loan balances, delinquencies and inaccuracies.  ​With daily, weekly and monthly alerts, improving your credit score becomes a ​faster, easier task.  

Here's the Lowdown on Credit

When you borrow money or buy something today and pay for it later, you use credit. Your ​credit reports​ and credit scores​ are created as a result of your financial activities.  ​

While ​building a great credit ​history may have seemed ​like an uphill battle in the past, today ​it's a lot easier to access information and tools that will help you monitor and track your outstanding balances, any delinquencies or collections. 

​Once you know where you stand, you can begin to fix any outstanding issues. 

​Receive positive feedback in the form of periodic alerts, reports and graphs, as you pay off debt, which takes the guesswork out of getting your finances under control. Today, it's a lot easier to arm yourself with ​tools ​that will help you use credit wisely.  

Modest Income? No Problem

Contrary to popular belief, credit is not just for people who earn a ​ton of money.  It's for anyone who can meet a lender's requirements when applying for a loan or credit card.  

If you have a modest income and you manage it well, you may be ​a better credit risk than someone who has a higher income level. Lenders don't only look at your income when considering you for a loan or credit cards. ​

​A number of factors are considered, like ​your credit score, loan amount, loan term, ​current income versus your current debt levels, payment history, etc., to determine if you are in a position to repay a loan.   If you meet the requirements, you get the loan. 

​Also keep in mind that people with good credit normally pay a lower interest rate than someone who has poor credit. ​That's why it's important to look at your credit score before making a major purchase. Addressing any issues beforehand, can boost your credit score, enabling you to qualify for lower interest rates.

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​Why You Want the Best Interest Rates Possible

Interest is the amount you pay for ​using someone else's money, or for delaying the repayment of a debt. It's additional money that's added to the original loan amount. ​ 

Each monthly loan installment or credit card payment includes a portion that goes toward the original loan amount, also called the principal (reducing your debt) and the other portion goes toward interest.

​Once you're approved for a loan, the clock starts ticking and the lender begins ​reporting your activities to ​three ​credit reporting companies.  In the United States, the credit reporting companies are Equifax, Experian and TransUnion,

When you take out a loan, or ​use your credit cards, these three credit reporting companies com​pile the information they receive about your credit, loan and payment activities into a credit report. 

​Here​'s Where ​Things Can Get Tricky

​Since not all businesses report to all three credit reporting companies, the information on ​the reports in each company may vary.  So for example, the credit ​report from TransUnion may differ from the ​report provided by Equifax.  

​Because the information in your credit reports may differ, the resulting credit score may differ as well.  That's why it's a good idea to get a copy of ​your report from all three companies at least once per year. 

Sometimes the information on your credit report may be erroneous.  You'll want to correct any inaccuracies as quickly as possible.  There is also a limit on the amount of time that ​items can stay on your report.

For example, negative information is reported for seven years, or 10 years if you’ve been through bankruptcy.  After th​e stated time passes, the items ​are supposed to "fall off" or be removed automatically.  

​​Review your credit​ report regularly, and dispute any errors. If you find outdated information, request that it be removed. You can dispute on your own or work with a credit repair company that will dispute erroneous information on your behalf.

If you ​regularly monitor your credit report, you can make improvements​ that can cause a boost in your credit score.

​Knowledge is Power

​Once you've addressed any issues with your credit report, and you know your credit score, there will be no need to be sweat bullets when you apply for a loan.  Taking action to monitor and stay on top of your credit will give you confidence when you apply for a loan or credit cards, and you'll be in a position to ​shop around for the best interest rates possible.

The down side of credit is not knowing when to stop. Loading yourself up with credit cards and​ maxing them out can be hazardous to your financial ​health.  ​Once you're in over your head, you may have to resort to higher interest rates, or file for bankruptcy to get back above water.  

​​​If you're in a negative place right now, the best thing to do is to stop the excessive spending and related negative activity.  Once you've stopped the "bleeding" so to speak, you can begin to take steps to improve your credit. When it comes to credit, knowledge and action gives you the power to take control of your finances and move ahead. 

What's Included in ​Your Credit Report?

A credit report is an organized list of the information related to your credit activity. When you make a payment on a credit card or loan, the lender keeps a record of how much and how often you pay, and whether you pay according to the terms of the loan or agreement.  Lenders also report on the credit limits and loan balances. Those businesses and other sources may report your credit, loan and payment history to one or more credit reporting companies.

Credit reports may include the following information:

  • A list of businesses that have given you credit or loans
  • The total amount for each loan or credit limit for each credit card
  • How often you paid your credit or loans on time, and the amount you paid
  • Any missed or late payments as well as bad debts
  • A list of businesses that have obtained your credit report within a certain time period
  • Your current and former names, address(es) and/or employers
  • Any bankruptcies, collections or other public record information

Federal law requires each of the three consumer credit reporting companies in the U.S., Equifax, Experian and TransUnion - to give you a free credit report every 12 months if you ask for it. ​  ​​

​Get Your Credit Score in a Matter of Minutes

​Sign up for ​​Identity Guard, get your free credit score from ​all three credit companies within a matter of minutes. ​​This will enable you to ​review and dispute discrepancies much earlier. They also give you identity theft protection and assistance if you find that you're a victim.  

​Get Your Free Annual Credit Report

You can order your free annual credit report from the three credit reporting companies online. You'll be taken to the TransUnion site where you can order all three reports for free.  

Once you get your reports, take a detailed look at ​each one to make sure it's accurate. If you find inaccuracies, contact the credit reporting agency that has the inaccurate information and submit a dispute. Disputes can usually be processed online, which makes it easier to resolve issues. 

This post may contain sponsored advertising, While we receive compensation from our sponsors, we partner with reputable brands, providing our honest opinions, findings and experiences with products and services. This is done in an effort to provide helpful insight and resources for our readers.

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I've been an online entrepreneur since 1998 and started this blog in April of 2015 to support the work at home lifestyle and provide information on healthy living. My goal is to help as many people as possible start and maintain successful home businesses.

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