When applying for a new loan or credit card, the first thing the lenders would ask will be about your financial health. While some lenders go for checking a detailed version of applicant’s credit health, others process the loan or credit application only after checking their financial standing. It may be noted that both the credit report and credit score are often used interchangeably by the lenders as per their need and loan sanctioning standards. However, at times, borrowers often confuse themselves between both the terms believing that both have the serves the same meaning. But, little did they know that there’s a thin line difference between credit score and credit report.
What is a credit score?
A credit score is a three-digit numerical representation of your finances, ranging from 300 to 900. Banks, financial institutions, insurance companies, landlords, and even the employers assess your credit score to determine the degree of financial risk and to ensure timely payments. Lenders report borrower’s payment history and financial relation to the credit bureaus and on the basis of certain factors, the credit bureaus generate credit score using a complex algorithm model. These scores help the lenders to determine the creditworthiness of a borrower and customize the loan offers accordingly.
What is a credit report?
On the other hand, a credit report is detailed breakdown of your credit score such as repayment history, outstanding debts, and types of credit accounts. Banks and credit card companies report the entire detail of your active and closed debts to the credit bureaus, which can be made available to third parties like potential lenders, insurance companies, and employers. However, when a credit report is accessed on request of a new loan or credit card, it pulls a hard inquiry, accounting for 10% of overall credit score.
How to generate credit score and credit report?
Technically, it is mandatory to have at least 6 months of credit history in order to generate credit score and a credit report. In case of young borrowers having financial record of less than 6 months, they might receive NH/NA (No history or Not Available) remark on their credit report. However, they can build their financial health over the course of time by ensuring timely payments, borrowing types of loans and keeping the credit utilization ratio below 35% of their net income.
Notably, your credit score is generated on the basis of credit record of up to 24 months (minimum 6 months at least), while your credit report includes your financial record for the last 36 months. In fact, some credit information like bankruptcy could remain on your credit report for up to 7 years. Though, after a certain period, it won’t affect the credit score.
Factors affecting credit score and credit report:
Payment history – Credit report includes a detailed version of your payment history accounting for 35% of your credit score. Payment history consist of details like number of dues paid on time, remaining EMIs, number of active and closed loan accounts, and derogatory public records, if any. Therefore, it is suggested to ensure timely payments of all your active loan accounts and credit card dues in order to save your scores from dipping down. Even a single default or missed payment could hit the credit scores drastically and could remain on the credit report for up to 7 years.
Debt to income ratio – Apart from the credit details, your credit report also includes information about your income, years of job experience, and overall credit limit. Debt to income ratio is calculated using a formula – total monthly debt divided by total monthly income. For example, you have total monthly debt of Rs.15000 (including all your loan EMIs and credit card dues) and a monthly income of Rs.50000, then your credit utilization would be around 30%. Your credit utilization is highly influential to the potential lenders as it helps them decide if you can afford a new line of credit with no risk of default payment.
Credit mix – Basically, there exists two types of loans – secured and unsecured. While, most of the times borrowers often overlook the credit mix factor mainly because they lack having an understanding of its significance in both the credit score and credit report. It may be noted that while evaluating your loan or credit eligibility, lenders pay close attention to every single details on your credit report, including a credit mix. By checking for credit mix on a credit report, lenders want to determine how experienced you’re with handling types of loan and credit accounts.
Outstanding dues – Having multiple credit cards is definitely exciting, but in order to keep the credit score within an excellent range, it is significant to keep minimum outstanding dues on your credit account. Lenders usually avoid sanctioning new line of credit to the applicants who’re already debt ridden with high amount of outstanding dues.
How to differentiate between credit score and credit report:
Meaning – First it is important to understand the difference between both the terms. While credit score is an algorithm of your financial health, a credit report maintains your record of credit history and serves the details to lenders for credit references.
Who reports it – Basically, any lender where you take credit from (such as banks, NBFCs, and financial institutions) report the credit record to the credit bureau companies. On the basis of details reported, credit score and credit report is generated. However, it is important to note that the lenders only report your financial records and doesn’t calculate the scores at their own.
How many exists – While there could be different credit scores from different bureaus, but the information recorded on the credit report usually remains same. Scores could vary for various credit bureaus because they could have different scoring methods.
Interchangeable terms – Yes, often both credit score and credit report terms are used interchangeably, though serves different purposes. While scores just give a rough idea about a person’s financial health, a credit report is a detailed version of how well he/she has managed the accounts so far.
Factors to compute creditworthiness – Credit score is a calculation of information included in a credit report. On the other, credit report consists of information such as payment history, account details, credit mix, credit age, and public records (if any). Credit scores are generated on the basis of contribution of these factors.
Who can have access to your credit report – Well, your credit report is a confidential document, which cannot be accessed without your given consent. Usually when you apply for a fresh loan, you’re giving consent to the lenders to pull a hard inquiry. Besides this, banks and insurance companies can check your credit score to provide you pre-approved credit offers and insurance quotes.
So, as we have understood that there is hardly any major difference between credit score and credit report, it is important to pay closer attention to every factor that could impact your overall credit health and financial standing.