Credit Score Versus Credit Report
It is essential that you can distinguish between a credit score and a credit report. There is a major difference. Credit reports are just reports that have information on your credit use. They show accounts that you have used in the past, and those that you use today. They show whether or not you paid on time, and how much you have borrowed.
Credit List
You will learn all of the details of your credit reports later in this book. For now, it might be wise just to think of your credit report as a credit list. Your credit report is like a big sheet of paper with a listing of your past behaviors. It also has personal information on you, such as your name, address, and Social Security Number. It is full of information, and looking through this list will take several minutes or more.
A Three-Digit Number
A credit score, on the other hand, is a three-digit number. The higher the number, the better (for most lending-oriented scores). Doesn't that sound simple? Credit scores exist to simplify the lending process. Instead of spending several minutes looking for a long list of data, a person or computer can just look at a three-digit number. This makes the process go faster, which means more people can get more loans at better rates. This is a win-win for consumers and lenders: when lenders switch from using credit reports to credit scores, they end up granting loans to an additional 20 percent to 30 percent of applicants (FICO statement to the Senate Committee On Banking, Housing, and Urban Affairs, 2003).
Just a Number
Just like your credit report, your credit score doesn't tell lenders whether or not to grant a loan. Your credit reports (or credit lists) are simply testimonials from other lenders. A new prospective lender may look through your credit reports and decide whether or not they wish to loan money to you. The report itself does not make the decision. Likewise, credit scores are just another piece of information that lenders use. A score below a certain number does not mean that you won't get a loan. It simply means that you may be more likely to fall behind on a payment.
Always remember the distinctions between FICO scores, other scores, and credit reports. Credit reports are raw data, typically from the credit-reporting companies. Credit-scoring models analyze the data. The most popular score for lending decisions is the FICO score. Other scores may be based on the same information as the FICO score, or they may incorporate additional information.
Nobody is 100 percent likely to make all of their payments on time. People may pay on time all the time, but no model in existence can claim that anything is 100 percent certain. Because of this, credit scores cannot rule you out as a borrower. Instead, lenders make decisions on how much risk they want to take. If they are unwilling to take much risk, they have to limit their lending. They can only accept customers who are least likely to fall behind on a payment. They accomplish this by setting an internal policy. Different lenders will set their limits at different credit scores, so it is the lender who ultimately makes a lending decision.
