Credit Scores, Credit Reports, And Why They Matter

You have probably seen commercials about “improving your credit score” or companies that will “give you your credit score” now you may be thinking “What the hell is a credit score?” Put simply a credit score is a three digit number that indicates how reliable you are as a borrower. Why does that matter? When you apply for a loan at a bank the bank has to evaluate whether to loan you the money and what interest rate to charge you.  If only there were a way for a bank to see how you have paid other loans and whether you default (don’t pay) on a lot of loans. Surprise! There is a way and it is called credit-scoring systems.  So before we delve deeper remember that the better your credit history and thus your credit score, the easier it is to obtain a loan and the lower the interest rate you will be charged.  Also remember that debit card payments and cash payments are not relevant here. Only credit financing (credit cards, loans, etc.) affects your credit score and credit report.

Key Points

  • A credit score is a three digit number between 300-850 (commonly called a FICO score) that reports how risky a borrower is. The higher this score, the better for you as a borrower.
  • The three national credit bureaus (Equifax, Experian, and TransUnion) calculate a credit score and are required by law to provide a free credit report to you every year if you request one.
  • A credit report is a comprehensive view of your credit history and other relevant information to your credit score (it will not list your credit score)
  • Call to correct errors on your credit report.
  • Be wary of credit repair agencies.

What is A Credit Score?

As I mentioned earlier a credit score is simply a number that indicates how reliable you are as a borrower based on previous loans and debt. Remember that by using a credit card you are essentially creating mini loans that will affect your credit score. The most common credit scoring system in use today is called FICO and was developed by the Fair Issac Corporation. This system gathers input information such as your payment history on loans, amount of money owed, etc. and spits out a number representing how likely you would be to default on a loan.  The three digit number ranges from 300-850 with a higher number being better for you.  This number is calculated based on algorithms that would terrify me but can be simplified.  The variables that affect your score and they are the following

FICO Score Components
FICO Score Components. Image courtesy of
  1. Payment History -35%: Have you paid previous loans on time? If you have a spotty track record this will pull your score way down as it represents a large part of the score.
  2. Amounts Owed – 30%: Are you using all the credit extended to you? Put differently if your credit card has a limit of $5,000 max each month are you charging $4,900? This can hurt your score.
  3. Length of Credit History – 15%: A longer history should improve your credit score as the credit agencies have more data to use. This also means that those with no credit history may have a hard time securing loans or low rates.
  4. Types of Credit Used – 10%: Do you have a credit card AND loans?  Having a mix of different credit could be favorable for your score IF you make the payments on the loans.
  5. New Credit – 10%: Have you opened three new credit cards in a short period of time? That is going to negatively affect your score as it opens the possibility for new defaults.

Great so now we know how your credit score is made…so who is assigning these scores? That would be the job of the three major national credit bureaus (Equifax, Experian and, TransUnion). It is the job of these Consumer Reporting Agencies (CRAs) to gather all of your credit information, use their own slightly different variations of the FICO scoring system, and brand you with a number that affects whether you will get a loan or not.  So where do you find this score? Some credit card companies will provide you with a score with every statement they send you, but this is rare. Let’s discuss credit reports and we will come back to this.

What Is A Credit Report?

A credit report contains the information the credit bureaus use to calculate your number such as your personal information, a record of your credit accounts, and bankruptcy filings. Luckily for you the credit bureaus are required by the Fair Credit Report Act (FCRA) to provide you with a free copy of your individual credit report every 12 months.

Here are the steps for obtaining the credit reports (one from each credit bureau):

  1. Go to
  2. Choose the “Request Your Credit Reports” Option
  3. Fill out the form with your personal information
  4. Choose that you want to obtain all three reports
  5. You will be directed to one of the three bureaus and you will obtain that bureau’s report
  6. Return to and obtain the other two reports

So you may now be reviewing the credit report and may be wondering “Where is that all important credit score?” Surprise! The credit agencies are required to provide you a credit report, but not a credit score. Womp.

If you really want to obtain your credit score use and purchase your credit scores from the individual agencies to save money. Be cautious and make sure that you are buying only your current credit score and not subscribing to an ongoing credit monitoring service.

How to Improve Your Credit Score

Here are some common tips for improving your score:

  1. Pay your bills on time
  2. Request your reports and check them for accuracy
  3. Limit the amount of debt you have outstanding
  4. Pay down debt

How to Correct Errors on the Credit Report

You’ve found an error on your credit report. You did not buy 234 pairs of Andrew Christian® underwear, but there it is on your report.  What now?  Time to call the creditor (let’s assume the erroneous charge was on a credit card, in this case it’s the credit card company) and go from there. Usually the problem will be solved by contacting either the credit bureau providing the report or the creditor.  Will it be easy? Depends on the size of the mistake and the helpfulness of the person you are put in contact with.  Just be patient and keep your eye on these sorts of mistakes.

Ending Remarks

There are many companies out there that advertise they can “repair your credit.” Many of these companies will charge you an outrageous amount of money and not meet their promises.  The idea here is simple. If it is an error on the report, call and fix it yourself. If it is a “self error” (ex. I can’t make payments on the excessive credit cards I have) do some self-improvement and work on that. None of this is rocket science but it does require a bit of self-discipline so be vigilant and keep that score as high as it can be.


  1. Credit score: A three digit numeric number that reflects the risk a borrower represents to a lender.
  2. FICO: A credit scoring system used to generate an individual’s credit score based on certain data.
  3. Credit report: A comprehensive report that details an individual’s credit history and other relevant information.

Further Reading

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