Your Credit Report & Score – The Ultimate Beginner’s Guide
Monitoring your credit is one of the most important things you can do when it comes to your financial health. If you have read my recent posts then you know that you can get your credit report for FREE by going to AnnualCreditReport.com. Every year you are allowed one free credit report from all 3 of the major credit reporting agencies: Equifax, Experian, and Transunion. That's 3 chances for you to check over the information in your report to make sure the information is correct. This also gives you the chance to eliminate things on your report that could be causing negative marks.
Checking your credit report is important, but it's also important that you monitor your actual credit score as well. There is a distinct difference between your report and score and if you are not aware of this difference it can have a negative effect on your finances. Not only are your credit score and report different, they might be used for different purposes as well. So today, I wanted to tell you about the important differences and give you some pretty amazing tools to help you monitor your credit score for FREE.
Your Credit Report
Your credit report has information that details your credit history. Your report also includes things that are not used for credit score purposes such as your address (past & present), your social security number, date of birth, and employment information. This information is strictly for identification purposes only. Your report also contains the following information:
- Types of credit you have (auto loan, mortgage loan, student loan, credit card, etc…)
- Balances and limits of credit accounts (tradelines)
- The date you opened the loans or lines of credit
- Account history (whether you have paid your bills on time)
- Collections
- New credit you have opened recently
- Public records (judgments, bankruptcy, or tax liens)
If you have ever looked at your credit report you will know that the one thing most people are interested in is not listed on the report and that is your actual credit score.
Your Credit Score
Your credit score is an actual numeric value that is generated from information on your credit report. There are a number of complex formulas for generating your credit score but FICO is probably the most well-known. Your credit score is used by potential lenders to determine how big of a financial risk you are. FICO scores ranch from 300 to 850 and a higher score tells lenders that you are not likely to default on your loans or miss payments. Certain information in your credit report is weighed more heavily than others when it comes to determining your FICO score. Here is how FICO breaks down information in your credit report:
- Payment History = 35%
- Amounts Owed = 30%
- Length of Credit History = 15%
- New Credit = 10%
- Credit Mix (a mix of different account types is good) = 10%
Depending on your credit situation, the importance of these categories might be different. For example: if you don't have a lot of credit history your amounts owed might not be as important as someone who has had a lengthy credit history.
Most of the time, getting a glimpse of your credit score costs money. For Experian, your credit score is a completely separate service and they will charge you a nominal fee to get it. When it comes to the financial impact of your credit, your credit score is probably the most important factor. When you apply for a loan, the lender probably has a predetermined number range to use when determining your loan terms. Every time they pull your credit score this generates a hard inquiry which does lower your credit score. They do this so they can quickly glance and determine your credit risk.
There are times when your credit report will be pulled as well. For example: when you apply for a new job, your new employer might pull your credit report (with your permission) to get a glimpse of how you handle your finances. If your report shows good financial history then they can assume you will also be responsible for the job.
Get an Estimate of Your Credit Score for FREE
Now that you know the difference between your credit score and report, it's important that you monitor both. Getting a free copy of credit report is easy but what about your actual score? There are some companies that do provide a FREE estimate of your credit score. The reason I say “estimate” is because the score they provide might be slightly different from the score a lender will actually see. With that being said, the score these companies provide are still beneficial and in my experience are pretty accurate.
I have used Credit Karma for over 7 years and it played a big role when I purchased my car last month. Since I had a good idea of my credit score was before I purchased my car, I was able to determine what special offers I would apply for through the car dealership. My Credit Karma score was 780 when I looked at it the day I bought my car and when the lender ran my credit they had it listed at 796. To me, that is pretty accurate. Here are three companies I have used to monitor my credit score for FREE.
Credit Karma
Credit Karma was founded in 2007. I have been using Credit Karma since 2011 and it has been a vital resource for my financial decisions. With Credit Karma, they literally break down your credit report, show you important factors that are impacting your score and then give you free resources and tools to address those factors. Not only do they provide you with your FREE credit score, they also have some other amazing features as well.
- Text alerts to let you know if and when there is a new inquiry. This is awesome because it helps battle identity theft. If you get an alert that a new account from Bank of America was added to your report but you did not open an account at Bank of America, this allows you to address the issue quickly. Having this feature gives me peace of mind that I know exactly what and when something on my credit report has changed.
- The My Spending tool is also helpful. This free tool allows you to see all of your spending in one place. It helps you identify your spending habits so you can see where you are now so you can get where you want to be.
- CreditKarma gives you a FREE credit score that is based on TransUnion data.
You can see all of Credit Karma's amazing FREE tools here.
Additional Resources
Credit Karma is not the only place you can check and monitor your credit score. Here are some additional resources for you to check out.
Credit.com: Credit.com not only gives you a free credit score but it also provides free expert advice. You get a personalized step-by-step action plan for your credit situation and advice on where to focus and what to do to improve your score. Credit.com gives a score based on the data in your Experian credit report. They give you two scores – the National Equivalency Score and VantageScore 3.0.
Use these FREE resources to monitor and maximize your credit report to your advantage and get the best financial options available.
Lots of great info here. I’ve been working to increase my credit score for the last few months. Since I’ve been paying off debt it’s been climbing up every month.
Getting your debt-to-income ratio down is a huge win for your credit score. Thanks for sharing Justina!
I love Credit Karma! It’s surprising how easy it is to get info about your credit score if you know where to look, but I seriously love Credit Karma because it gives you your actual score. Thanks for the round up!
Thanks Melissa!
Thank you for this very informative article. A lot of good points to take into consideration.