By Michael Grace | American Express Credit Intel Freelance Contributor
5 Min Read | June 14, 2021 in Credit Score
Credit reports are historical profiles of a person’s behavior patterns when it comes to borrowing and paying back money. The data they contain is used to generate credit scores.
Credit scores are statistical analyses of credit report data expressed as a three-digit number from 300 to 850. They may vary based on time, reporting agency, and other factors.
A credit limit is the maximum amount your credit card issuer is willing to extend to you before you need to pay off some of your balance.
All three of these factor into your creditworthiness.
When it comes to managing your credit, all the different terminology may at times feel confusing. A good way to keep things straight between a credit report, a credit score, and a credit limit is to understand what each one means. Then you can better comprehend their differences as well as how they all work together.
Let’s set the table by briefly defining a credit report, a credit score, and a credit limit.
A credit report shows your history of borrowing money and repaying it. Such records include credit cards, student loans, car loans, mortgages, home equity loans, and other forms of borrowing. Credit reports also may reflect negative financial information like bankruptcies, foreclosures, and vehicle repossessions – usually referred to as “derogatory” items by credit bureaus.
A credit score are three-digit number that aims to predict how much of a risk it would be for a lender to extend credit to a particular person. In other words, it assesses your creditworthiness. The way lenders and credit bureaus see it, the higher your credit score, the less likely you are to default on a loan. Base credit scores range from 300 to 850, with anything from the high 700s upward considered very good or exceptional. Certain specialized, industry-specific credit scores range from 250 to 900.
Credit limit refers to the maximum amount of money you may borrow on a credit card or other revolving debt, like a home equity line of credit (HELOC). If you have one card with a maximum allowable balance of $5,000, then your credit limit is $5,000. If you have two credit cards with $5,000 limits, then your total credit limit is $10,000.
|Credit scores are three-digit numerical expressions of your creditworthiness, based on the information in your credit report. The higher your credit score, the more likely you’ll be approved for credit with lower interest rates.
|Credit reports show your history of borrowing and repaying money to creditors, such as credit card issuers, mortgage lenders, student loan issuers, and more.
|Credit limit is the maximum amount of money you can borrow on a credit card or other form of revolving debt. For example, if you have two credit cards each with a $10,000 credit limit, your total credit limit would be $20,000.|
What exactly is the difference between a credit report and a credit score, and how do they work together?
Your credit report reflects your credit activity, from credit card balances to loan payments to credit inquiries. Your credit score is a calculation based on that activity. If this were a movie, you could think of a credit report as the screenplay, which includes notes about the acting, directing, and cinematography. Then think of a credit score as how many stars the critics give to the movie.
Three national credit bureaus generate credit reports: Equifax, Experian, and TransUnion. Each bureau generates its reports slightly differently, but key items looked at include:
Credit reports typically look back at seven years of data to establish creditworthiness. In certain instances, such as a Chapter 7 bankruptcy, the credit reporting agency may go back 10 years. Personal finance experts advise that you periodically check your credit report for potential discrepancies. Doing so may help improve your credit history, which may boost your credit score. You’re entitled to request one free credit report every 12 months from each of the three major credit bureaus, also referred to as credit reporting agencies.
Some experts suggest staggering those reports every four months to better track changes. There also are other ways of obtaining free credit reports, as your credit card issuer or bank may offer them as a service. This may come in handy when you begin saving for a down payment on a home or another major purchase requiring a large loan.
Your credit report is used to calculate your credit score. The five main factors analyzed when generating a credit score include your:
Creditors typically report their data to the bureaus once a month. So your credit score may fluctuate monthly, weekly, or even daily depending on when updates are sent and the score computed. Credit scores also can change as older items fall off your report and if more recent activity reflects changing borrowing habits.
Multiple companies provide credit scores to consumers, with FICO and VantageScore being the two main scoring systems. Each of them calculates their credit scores differently, though both aim at the same goal of assessing the risk of loaning money to a particular person. In all of these systems, however, this remains true: Higher credit scores indicate greater creditworthiness.
Changes in your credit limit are reflected on your credit report and can change your credit score. For example, an increase in your credit limit would result in an improved score if your spending doesn’t change because you would be using less of your available credit and therefore have an improved credit utilization ratio. However, if you increased your spending to match that higher limit, the proportions wouldn’t change and, likely, neither would your credit score.
Applying for a new credit card may increase your credit limit as well, but that also typically triggers a “hard inquiry” into your credit history and can lower your credit score a few points in the short term.
A credit report shows your history of borrowing and repaying money to lenders, and its data is used to generate your credit score. The higher your credit score, the more creditworthy you appear to lenders. Your credit limit is simply the maximum amount a credit card issuer is willing to lend you before you start repaying your outstanding balance. It’s a good idea to check your credit report regularly for potential errors that may negatively impact your credit score.