Imagine you’re on a mission to achieve a credit score of 750 or higher. You’ve been diligent, making timely payments, keeping your debt low, and maintaining a healthy mix of credit. But then, you hit a roadblock.
You’re confused about the difference between your credit score and your credit report. If this sounds like you, then you’re in the right place.
What Makes Up Your Credit Score?
Most people are aware of the five factors that make up a credit score: payment history, the amount of debt owed, the length of credit history, the credit mix, and new credit.
However, there’s a common misconception that the length of credit history has a more significant impact on the credit score than the payment history. This is not entirely accurate.
The length of your credit history, such as having a 20-year-old account, might seem impressive. But did you know that credit bureaus typically only consider the last two years of your payment history?
So, even if you have a long-standing account, if you’ve missed a payment within the last two years, it could have a more negative impact on your credit score than a newer account with consistent payments.
VantageScore vs. FICO Score: Which One Matters More?
When it comes to credit scores, there are two main players: VantageScore and FICO.
While VantageScore is commonly used by credit unions, traditional lenders typically use FICO. This distinction is crucial because the two scoring models can yield different results.
For instance, a client once boasted about his 700 VantageScore. But when he checked his FICO score—the one that banks use—he found it was significantly lower.
This discrepancy can be attributed to the fact that VantageScore and FICO use different algorithms to calculate credit scores.
Why Your Credit Report Matters More Than Your Credit Score
While your credit score is important, your credit report holds more weight. Why? Because your credit report contains all your credit-related data.
If this data isn’t accurate, you could still get denied for credit, regardless of what your credit score says.
Your credit report includes personal data, such as your name, address, and employment information. It also lists your credit accounts and inquiries.
If there’s misinformation, such as an account that doesn’t belong to you, it could negatively impact your creditworthiness.
How Many Credit Accounts Do You Really Need?
There’s a common belief that you need a plethora of credit cards and accounts to get approved for mortgages and other loans.
However, this isn’t necessarily true. In fact, having just three to four accounts can be sufficient for approval.
For example, you might have a department store card, a car payment, and a couple of other accounts. If these accounts are in good standing and you’re making consistent payments, you could qualify for a mortgage.
The Impact of Inquiries and New Accounts on Your Credit Report
Inquiries can also affect your creditworthiness.
If you have more than eight inquiries within a 12-month period on a single credit bureau, lenders might see this as a red flag. The same goes for opening too many new accounts within a short period.
The Role of Income and Employment in Your Creditworthiness
Your income and employment information also play a crucial role in your creditworthiness.
For instance, if you’re on SSI or retired, it might be more beneficial to list a side business as your employment on your credit file.
Lenders often view these income sources as limited, which could result in lower credit limits or denials.
The Bottom Line: Your Credit Report is a Reflection of Your Financial Health
In conclusion, while your credit score is a useful tool for gauging your creditworthiness, your credit report is a more comprehensive reflection of your financial health.
It’s essential to understand the difference between the two and to ensure that your credit report is accurate.
Remember, achieving a high credit score is not just about having a long credit history or a large number of accounts.
It’s about managing your credit responsibly, making timely payments, and maintaining accurate information on your credit report.
