Maintaining a good credit is a very important part of your financial health. When you apply for a loan, be it a home loan or loan for a car, the loan lenders look into your credit history. This gives them an idea of your financial health and your repaying capability. The credit history also gives them a fair idea of any previous debt that you have paid.
For anyone who is applying for loan for the first time might want to know their credit health. Credit score and credit report can individuals a fair idea of the same. We know it can get confusing as both the term sound very similar. But beware; both credit score and credit report are very different terms.
A credit report is an entire document that has the details of all your previous credit. While a credit score is a three-digit number that is obtained by a certain algorithm. Credit report has your credit score.
Let us discuss free credit report and free credit score in detail:
Free credit report:
The credit report is the statement of all the payments that you have done for your credit accounts like a student loan, home loan, or any other mortgage. The credit companies compile and provide it to their customers. According to the law, you are entitled to a free copy of your credit report once a year. It is good practice to keep checking your credit report every few months or so, just to keep a check of your credit health. All the credit companies have different credit report system, it is better to get the report from them as well. Since asking for a credit report does not trigger an enquiry, hence it does not have any negative impact on your credit score. Although, if you are a victim of fraud, met bankruptcy, are unemployed and looking for a job or you have been turned down a loan on the basis of your credit, you are entitled to free copies of your report.
Apart from the above, credit reports also contains your details like name, address, your PAN along with the information of all the credit accounts that you have opened in the past. It includes the date on which the accounts were opened, the loan amount, the payment history, your credit limit, you balances, late payments, and every other information that will help the loan lenders in future to decide whether to give you a loan or not.
Free credit score:
The credit scores are the three digit number obtained by applying the algorithm to the credit report. The credit score helps in determining your repayment capability. The credit score ranges from 300 to 850, the credit score above 750 is considered an excellent score. A score between 7—to 749 is considered a good score. If the score falls below 700, then it is a red flag for the companies.
What comprises the credit score?
- Payment history: it makes a total of 35% of your credit score. It is one of the most important factors in calculating your score. If there is a delay in your payment, it can affect your score severely and bring it down 90 to 110 points. It is therefore important to remember to never miss your payments.
- Money owned: This makes 30% of your credit score. The amount that you owe on all your credit cards and the percentage of the available credit that you are using. This is called the utilization ratio. If the utilization is high, then it indicated that you are going to default on your payment.
- Credit history: This contributes to 15% of the credit score. It averages the length of your oldest and newest credit accounts. The best credit history is around 7.5 years. It is what the lenders look for when they look at your credit history. They want to know how responsible you have been with your payments.
- Various credits: This contributes 10% to your credit score. Having various credit accounts like installment loans and home mortgage can hike your credit score.
- New credit account: This contributes to the remaining 10% of the credit score. Opening new accounts in a short period of time reflects negatively on your credit score and can also trigger a hard enquiry.
Though the credit score is not available in your credit report, there are some websites that can provide you with your accurate credit score for free. The credit score can be affected adversely but it will take a while for your score to build up again. The key of a good score if the keeping a track of your spending habits, checking the score regularly and never missing out a payment. Checking your credit score does not hurt your score as well.