Many Americans still find credit reports and scores confusing, although this dilemma is understandable. They share many similarities, including sounding alike. Both can affect how you can manage your finances.
But even if they are interrelated, they are also different. Spelling this out can help a person, especially a millennial in the Beehive State, make more informed decisions. This is especially true once they feel ready to take out debts like home loans.
What Is a Credit Report?
A credit report is an extensive document that displays the following information:
- Credit or borrowing history as well as repayments and overdue
- Public records that may affect credit ranking such as bankruptcy
- List of collection agencies assigned to collect your debt
- Requests for credit reports made by companies like banks
A person can request a credit report anytime and as many times as they like. However, they can get the first report annually for free from any of the three (or all) credit bureaus. These are TransUnion, Equifax, and Experian.
What Is a Credit Score?
A credit score is a three-digit number that reflects a person’s creditworthiness. Contrary to popular belief, a credit report usually doesn’t include the score. Instead, one may know their number once they talk to lenders.
There’s also no official kind of credit score. Lenders and credit bureaus may rely on either FICO by Fair Isaac or VantageScore developed by TransUnion, Experian, and Equifax.
Both usually share the same metrics in calculating one’s score. These include:
- Diversity of debt (also known as credit mix)
- Payment history
- Amount of the debt
- Credit history length or age
- Credit utilization ratio, which helps determine one’s reliance on non-cash sources like debt
- New credit
However, the weight of each of these factors can vary on these two scores. For instance, Fair Isaac considers one’s payment history as the most valuable. Meanwhile, Vantage Score is more likely to focus on available credit and utilization instead of credit history age or length, or payment history.
Both have the same range of scores, which is from 300 to 850. However, what is considered the best score can slightly differ between the two. The most ideal FICO score is 800 to 850. VantageScore may start at 781.
For this reason, borrowers are strongly encouraged to know the kind of score model the lenders use and their preferred credit score.
How Both Affect Millennial Finances?
While these are two different data, the information of the credit report can partly influence one’s credit scores.
But how do these specifically impact millennials? This generation now accounts for the vast majority of workers and consumers in the United States, particularly in states like Utah. However, a 2019 report revealed that they are also prone to debt application rejections.
One of the common reasons is a thin credit history. Millennials are young and are therefore less likely to have experiences with diverse debt products.
Moreover, data showed that they’re not heavy credit card users. They may find themselves stuck in a vicious cycle of rejections as thin credit history may result in a lower credit score.
Fortunately, numbers and data can still change (and they often do annually). In fact, Experian reported that millennials have already increased their FICO score over the last five years.
They can use a year to be more aggressive in building their credit history. For instance, they can open a few credit cards and pay their debt religiously and with an amount higher than the required minimum.
Meanwhile, they can explore lenders and loans that may be specifically designed for their needs and requirements, especially a more achievable FICO score.