Just as your blood pressure reading is an indication of your health, your credit score provides helpful shorthand for your financial well-being. Your creditworthiness directly impacts your pocketbook, affecting the interest rates you’ll be offered on loans, your insurance premiums, even your job prospects—employers often check a candidate’s credit history when hiring. Many people only learn how they score when applying for a loan or credit card. But regularly reviewing your credit score and credit reports can uncover trouble spots or suspicious activity before they get out of control.
So, credit scores and credit reports: What’s the difference?
A credit report is an in-depth look at your credit history, showing the loans and credit lines you’ve taken out over time, as well as your payment history and current level of available credit. It can also include any public records that shed light on your financial health (such as bankruptcy declarations, foreclosures or debt judgments).
A credit score is a single number that serves as a shorthand summary of all the information contained in your credit report, which lenders and others can use to quickly evaluate you as a potential borrower. Each of the three major credit reporting agencies—Equifax, Experian and TransUnion—has its own credit score, using information from a variety of sources. Many lenders also use credit scores provided by the Fair Isaac Corporation, or FICO.
You can review your credit report for free once every 12 months by requesting a copy at annualcreditreport.com. Doing so is not considered a “hard inquiry” on your credit and will not negatively impact your credit score. Reviewing your credit history gives you the opportunity to correct any mistakes (which will improve your score) and is an effective way to guard against identity theft. (For more tips on how to protect your information and your investments, please read our special report on cybersecurity.)
While the credit rating agencies often charge a fee to view your score, many other services, such as Mint or Credit Karma or even your credit card company, provide free credit score features. If you haven’t reviewed your credit score in the past year, it may be worth checking to see where you stand.
FICO, the most widely used credit score provider among lenders, tweaked its formula in late 2020. The biggest change is that now FICO takes a longer view of your credit usage—evaluating the 24-month trend rather than a monthly snapshot. With this, borrowers who pay off their credit balance on a consistent basis should see an improvement in their scores. Personal loans will also be considered separately moving forward. If you’ve consolidated credit card debt with a personal loan but still have high monthly balances on your cards, your score may be negatively affected.
Have questions about your credit score and how to improve it? Talk to your wealth management team. We’re happy to help.