At some point, you’ll likely need to borrow money. Whether it’s for a home, a car, or another major expense, lenders will look closely at your credit report and credit score before approving a loan. Your credit report and credit score tell lenders how you’ve handled credit in the past and how risky it might be to lend to you.
Once you understand how your credit report and credit score work, the process becomes much less intimidating. Knowing what lenders look for can help you walk in with a better shot at a lower rate and fewer surprises along the way.
Here are eight essential things to know.
1. To get credit, you need to have credit
This may sound strange, but it’s true. Before you can qualify for a loan, you need a history of using credit responsibly.
If you’ve never borrowed money before, lenders don’t have much information to review on your credit report and credit score. That can make it harder to get approved.
If you’re just starting out, one of the easiest ways to begin is to open a low-limit credit card, make small purchases you can pay off right away, or finance a small item and stick to the payments. Each of these builds the kind of history lenders want to see.
2. Your credit report and credit score are not the same
Many people think these terms mean the same thing. They don’t.
Your credit report and credit score are connected, but they serve different purposes.
Your credit report is a detailed record of your credit history. It includes:
- Your open and closed accounts
- Your payment history
- Credit applications
- Accounts sent to collections
- Public records like bankruptcies or liens
Your credit score is a three-digit number from 300 to 850, based on your credit report. Higher scores are better.
Think of your credit report as the full story and your credit score as the summary grade.
3. A higher credit score can save you thousands
Your credit report and credit score directly affect the interest rate you receive on a loan.
A higher score shows lenders you’re less risky, which can mean lower interest rates, better loan terms, and more options.
Even a small difference in your interest rate can save you thousands over time, especially on a mortgage.
If you plan to buy a home, improving your credit first can make a big financial difference.
4. What makes up your credit score?
Your credit score is based on five main factors:
- Payment history (35%)
This is the most important factor. Paying on time matters most. - Credit usage (30%)
This is how much of your credit you use. Stay below 30% of your limit. - Length of credit history (15%)
Older accounts help your score. Even if you don’t use a card often, keeping it open may help. - Types of credit (10%)
Having a mix like credit cards, auto loans, or a mortgage can strengthen your credit profile. - Credit inquiries (10%)
Each time you apply for credit, it creates an inquiry. Too many inquiries in a short time can lower your score.
When you know what drives your credit report and credit score, you can make decisions that move the needle.
5. You should check your credit report every year
You are entitled to one free credit report each year from each major credit bureau at annualcreditreport.com.
Regularly reviewing your credit lets you catch errors early, spot fraud, and ensure lenders see correct information.
Also, it’s good to know that checking your own report does not hurt your score.
Many of our clients in the Battle Creek and Kalamazoo areas are surprised to find small errors that can be quickly fixed. It only takes about 15 minutes, and the effort is worth it.
6. You have rights when it comes to your credit report and credit score
Federal law gives you the right to dispute errors. This matters because your credit report and credit score affect whether you get a mortgage, what interest rate you pay, and sometimes even whether you get a job. The information in your file needs to be right.
If something is wrong on your credit report, contact the credit bureau, request an investigation, and ask for corrections. The process isn’t complicated, and bureaus are required to respond.
You also have the right to limit certain credit-related marketing offers. You can opt out of most prescreened credit and insurance offers by visiting OptOutPrescreen.com, a website run by the major credit bureaus.
7. Your credit score is yours alone
Even if you’re married, your credit score is individual.
If you share a joint account, both people are responsible for payments. If a payment is missed, it can affect both credit reports.
However, adding someone as an authorized user does not automatically lower your score. What matters most is how the account is managed.
That’s why knowing what’s on your credit report and credit score matters for both of you.
8. Negative marks don’t last forever
Past credit problems don’t define you forever.
Most negative information drops off after several years, typically between two and 10.
And as time passes, older negative items have less impact, especially if you develop better habits moving forward.
Your credit report and credit score are not permanent labels. They reflect patterns, and patterns can change.
Final thoughts
If you’re making a major purchase, understanding your credit report and credit score is essential.
At Allegiant Wealth Strategies, we help individuals and families in Battle Creek, Kalamazoo, and nearby communities review their credit and prepare for important financial decisions. Review will be for educational purposes only. Specialized credit services not offered through Allegiant Wealth Strategies or Cetera Wealth Services, LLC.
If you’d like guidance or a second set of eyes on your situation, we’re here to help. Schedule a complimentary, no-obligation consultation, and we can walk through your credit report and credit score together.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to ensure our information is accurate and useful, we recommend that you consult a tax preparer, professional tax advisor, or lawyer.