Why Your Credit Report Matters More Than Your Credit Score

Focusing only your credit score is like focusing only on your cholesterol number or your age -- the number's important, but not as important as how you got there.

That's why the real key to credit is your credit report.

If there are inaccuracies on your report, your credit score will suffer. Inaccurate or negative information can affect what you pay for insurance, your ability to get a job or rent a home, and how much you will pay to borrow money. The good news is the report, rather than a score, is something you can change -- either by eliminating bad habits or correcting errors.

Here are some other reasons to focus on your report rather than your score:

You can't dispute a credit score, but you can dispute parts of a credit report: You can protest -- in writing -- any information you feel is incorrect or incomplete. Even if the information is factually correct, you have the right to tell your side of the story in up to 100 words, and the credit bureau must attach the information to your file unless the bureau decides the statement is irrelevant. Credit bureaus differ on rules for this (See "How to file your 100-word credit report statement"). Anyone who requests a copy of your report would get this statement with it. They're not required to, but may take it into account and cut you a break.

Your credit score differs by reporting agency and scoring model, so it's harder to get an accurate picture. There's one formula for the FICO credit score. FICO's main competitor -- VantageScore -- has a different one. The credit bureaus offer their own specialized scores, with varying formulas. Also, "the big lenders, the mortgage companies and the credit card companies end up with their own valuation," says Stephen Brobeck, executive director of the Consumer Federation of America. "And even if Lender A and Lender B use exactly the same data, exactly the same scores, they could treat the scores differently. Lender A could treat your score like a subprime score and charge you more, and Lender B might treat it as a prime score and charge you less." This is one reason it's important to shop around for credit, Brobeck says.

Your credit score simply represents the information in your credit report: It's like an English paper in high school, says Rod Griffin, director of education for credit bureau Experian. You don't have a grade until you give it to the teacher. "You do the 'paper' -- you decide how you'll manage the bills and how much debt you're going to have. When you apply for credit, the lender is the teacher. They will use a credit score to analyze the information. Every time your credit score is requested, a different score could be calculated, even if it's just a few minutes apart," he says.

Insurers rely on information pulled from your report: They can't see your whole report, but in many states, insurers rely on a credit-based insurance score developed by companies such as FICO, using key information from your report. "They're looking for someone whose credit card history has shown them to be a responsible person ... The insurance industry has found this a very predictive model when they are assessing the likelihood of whether someone will file a claim," says Michael Barry, a vice president with the Insurance Information Institute.

Potential employers will be looking at your report, not your score: "Employers never receive a credit score," Griffin says. "They get an edited version of a person's credit report. There's nothing that would violate the Equal Employment Opportunity Act, so there's no information about birthdate or spousal information, for instance." Employers use the personal and account information to confirm your identity and to see how you handle money. The latter reason is controversial, and several states, given the state of the economy, have recently passed laws that limit employers' ability to check applicants' credit unless the information is vital to the job's duties.

Your report may tip you off to identity theft. "Don't assume that a misspelled name means the bank just made a harmless error," says Edward Sanchez, president of Money Sharp Credit Counseling in Chicago. "This could signal that someone has opened up an account in your name." Also look for information that could belong to someone else, especially if you have a common name. Incorrect middle initials and suffixes, such as Jr. when  Sr. is correct, are common mistakes that can lead to a faulty report, he says.

Paying attention to your report is quick and free. Under federal law, you can get one report each year from each of the three major reporting agencies: Experian, TransUnion and Equifax. So your first step is to go to AnnualCreditReport.com and click on the one you choose. This is the only site that offers you a free, no-strings-attached report.

If you find errors, you have a right to dispute any charge for free. Under the Fair Credit Reporting Act, both the credit bureau and the company that provided the information (such as a credit card issuer) are responsible for correcting inaccurate information, so contact them both.

If the information is accurate but there are parts you'd like to clean up, know that you might be out of luck. Accurate negative information typically stays on a credit report for at least seven years, and bankruptcy information -- depending on the type of bankruptcy -- can remain on your report for up to 10 years. You can certainly ask your lender to remove that ugly data early, but they're under no obligation to do so and will most likely refuse your request.

In that case, your best move is to change your behavior and your habits. If your credit is damaged by late payments, make that your first priority to change, Griffin says. Payment history makes up 35% of your FICO score, so black marks here will really cost you. Good payment history is more important than having account longevity, for instance, which makes up only 15% of the FICO score. Consider payment reminders or set up automatic payments.

"It's not a big secret," Griffin says. Pay your bills on time and keep your balances low on your accounts, and your credit report will take care of itself.