When talking about personal finance, some of the most commonly asked questions are the definitions and differences among credit, credit report, and credit score. The topic of credit scoring is in fact a very interesting topic. People used to think of credit scoring as something purely associated with the purchase of expensive items, like a new house or a new car. But today, the importance of credit scoring has increased in such a way that it can affect even a person’s chances of landing a good job. This is true particularly for jobs related to finance, as employers are now more conscious of their employees’ financial and credit backgrounds.
It is important first that you know what credit is. Well, it is just like a report card that shows how good payer you are. It is basically a record of all the payments you make for your mortgage loans, credit card bills, and so on. Every time you purchase something that needs to be paid on a monthly basis, for instance, those who collect your payment makes a report of all the transactions they have with you. Rent payments, utility bills, and cellphone charges are not part of this record, though.
On the other hand, credit score is a number, from the low of 300 to a high of 850, which is determined by certain credit institutions. What you would want is to have a high score, which means you have a good credit record. Your score can be determined by five different criteria: your payment history, the amount you owe compared to your available credit, length of your history, kind of credit, and inquiries. Your payment history has the biggest impact on your score. This is about your ability to pay your debts on time. The second factor, the ratio between your credit available and your outstanding balance is another important factor to your score. Keep in mind that having a higher outstanding balance than your limit will cause you to have a low score.
The length of your history also has a bearing on your credit score. The shorter credit history you have, the higher credit score you will gain. Meanwhile, the kind of credit you have also plays a role in the determination of your score. Having debt only from cards is worse than having a combination of various loans.
So what about credit reports? It is the document containing the information about your previous credit accounts, especially those reported to the credit institutions. This document can show you your current status in terms of the money you owe to lenders or creditors. You will see in this document how much money you owe, how much you have already paid, and how much you still need to pay. This report also includes some of your personal information, such as your present or previous addresses as well as your employment history. What’s important about your credit report is that you will find here your credit score.