credit reports and credit scoresWe all know what it’s like to receive grades, but perhaps no grade is more important than your credit score. Whether you need to take out a personal loan or mortgage, want to open a credit card or simply need to be approved to rent an apartment, your credit reports and/or credit scores are likely to come into play. Because they’re important to nearly every aspect of your life, we’re explaining what your credit reports and credit scores are, how they differ and why they matter.

What are credit reports?

A credit report is a detailed record of your credit history — how you’ve handled debt, bills and credit payments in the past. There are three main credit bureaus that create credit reports: Experian, Equifax and TransUnion. Each of your lenders, from your credit card issuer to your mortgage lender, reports your monthly account activity to the credit bureaus. That information is then used to create your credit reports. Since each bureau receives account information from different sources, each of your reports will likely be slightly different, which is why it’s important for you to check all three of your credit reports.

How to check your credit reports

It’s important for you to check your credit reports because these reports are what’s used to determine your credit scores, as explained in the credit scores section below. There are a couple of ways you can check your credit reports. First, you can get a copy of all three credit reports for free once every 12 months through AnnualCreditReport.com (note that any other copies requested within the 12-month span come with a fee). While checking your credit reports once per year is better than not checking them at all, it’s not the best option, as mistakes and phony credit accounts opened by identity thieves can happen at any time and wreak havoc on your reports, resulting in a drop in credit scores. As such, it’s in your interest to check your reports as often as possible.

Another way to check your credit reports is to consider signing up for a credit monitoring service. These services will not only provide you with copies of your credit reports after signup, but they will also monitor your reports and alert you if something is changed or added. What’s more, most credit monitoring services offer free trials, meaning you can test the service before making a financial commitment, and a handful of services are completely free (note that they usually only provide one of your three credit reports).

What are credit scores?

There are many different credit score models (e.g., FICO, Vantage), and their scores are calculated in different ways. But it all essentially boils down to a grade of your credit reports, just with the factors weighted differently. For example, if your credit reports note a perfect history, meaning everything was paid on time and in full, you will have higher credit scores. On the flip side, if you tend to pay your credit card late, your scores will be on the lower end. The exact scores and how much different actions impact them will vary from scoring model to scoring model.

How to check your credit scores

Just like with credit reports, you have three credit scores — one for each bureau (Experian, TransUnion, Equifax), which means in order to get a complete picture of your credit health, you’ll want to check all three of your credit scores. Although you can’t check your credit scores every 12 months for free like your credit reports, you can pay to receive your credit scores from each of the main credit bureaus (it’s usually $5 to $10 per score). In addition, some credit card companies offer free credit score tools and you can get access to credit scores through various credit monitoring companies — sometimes for free with a free trial.

What’s the difference between the two?

Think of your credit reports as progress reports and your credit scores as final grades. Your credit reports include a lot of detailed information, and companies (e.g., FICO, Vantage) use that detailed information to give you a simple score — your credit score. Like a grade, this score is a way for your overall performance to be quickly evaluated. Instead of looking through your records, a credit issuer, employer or landlord can quickly see that you are an A, B, or C student when it comes to credit, and decide how trustworthy you are accordingly.

Why do credit reports and credit scores matter?

Your credit reports and credit scores will affect many of the important aspects of your life. Most landlords run a credit check before renting to someone. When you want to buy a house, the terms of your mortgage will depend on your credit. When you apply for a job, your prospective employer may run a credit check, depending on the type of business or position you’ve applied for. Your credit can also determine where you live in retirement.

On top of that, your credit scores can also affect how you spend. With low credit scores, you essentially can only spend what you have right now, as there aren’t a lot of credit options for those with bad credit, while good or excellent credit can get you approved for a number of credit cards, allowing you to earn rewards for purchases you were already planning to make (e.g., your monthly bills) and providing you with the added privilege of flexibility in when and how you pay for those purchases. Essentially, your credit impacts almost every aspect of your life.

Now that you understand the importance of your credit reports and scores, you’ll want to monitor them. Monitoring your credit is an ongoing affair and there’s always more to learn. Follow our credit monitoring blog to see what you should look for when you’re checking your credit reports and scores.

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