If you’re an international student who just arrived in the U.S., or someone who has been here for a while but still isn’t familiar with how the credit system works, why should you apply for a credit card? It’s not just because credit cards can earn generous cash back, but also because they help you build valuable credit history. Having a good credit history can positively affect many aspects of your life. Your credit history and credit score directly affect whether you can qualify for a mortgage or auto loan, as well as the interest rate you receive. Setting up phone service, renting an apartment, and more may also involve a credit check. That’s why it’s very important to understand credit reports and how credit scores are calculated. This article introduces some basic knowledge about credit reports and credit scores.
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Q: Where do credit reports come from?
A: There are three major credit bureaus in the United States: TransUnion, Experian, and Equifax. Each one keeps a credit report on you. Every time you apply for a credit card, the bank may request a copy of your credit report from one or more of these bureaus; this is called a Hard Pull. When a bank or another third-party service provides you with your credit report or score, they usually only perform a soft pull with the credit bureau. The difference is that the former can affect your credit score, while the latter does not.
Q: How is a credit score calculated?
A: After a bank or other third-party institution obtains your credit report from a credit bureau, it uses a scoring model to calculate a credit score based on that report. The vast majority of banks use the FICO model, so a FICO score is generally the most valuable credit score to track. While the exact FICO algorithm is not public, we do know it is made up of the following five parts (image from the Discover website):
- Payment history
- This simply means not failing to pay what you owe. After each statement is issued, as long as you pay at least the minimum payment by the due date, your credit score will not be harmed. Of course, because interest applies, it is better not to pay only the minimum payment and instead pay as much as possible. However, even if you miss a payment, as long as you pay it within 30 days after the due date, it generally will not be reported to the credit bureaus, because credit reports do not show delinquencies that are less than 30 days past due.
- Amounts you owe
- This is commonly known as Utilization, meaning the ratio of your outstanding balance to your total credit limit. If your utilization is high, banks may think you rely more heavily on borrowing, which can negatively affect your credit score. Credit bureaus generally recommend keeping utilization below 30%, while many people’s experience suggests that keeping utilization in the 1%-5% range is best for your score. So it is recommended to pay off most of your balance before your monthly statement close dates, so the balance shown on your statements stays at a very low level.
- Length of credit history
- The length of your credit history includes two aspects: the age of your oldest account, and the average age of all your accounts. To improve this part of your score, it is generally recommended that your earliest few credit cards be no-annual-fee cards and that you never close them.
- New credit opened
- This refers to recently opened accounts and the number of Hard Pulls. If there are too many, your score can drop. One thing to note is that a Hard Pull stays on your credit report for only two years, and banks generally care most about the number of HPs within the past six months.
- Types of credit
- This includes credit cards, mortgages, auto loans, student loans, and other types of credit. In general, having a wider mix of credit types can make banks think you are more capable of managing debt, which may have a positive impact on your credit score.
Q: How can I get my credit score?
A: First, let’s talk about the most authoritative one: the FICO score.
- Discover and Barclays provide a FICO score based on your TransUnion credit report.
- Citi provides an Equifax FICO score.
- AMEX and Chase Slate provide an Experian FICO score.
As long as you have any one of the cards above, you can view your credit score after logging into your online account. Discover even lets you check your score directly in its mobile app. However, because there are many different FICO models designed for different industries, don’t be surprised if another institution, such as a mortgage loan agent, gives you a different score. Some third-party websites also calculate scores using other models. These models are not considered authoritative, and the scores they produce can differ quite a bit from your FICO score, so there’s no need to take them too seriously. That said, these websites often let you see not only a credit score but also your credit report.
Q: How can I get my credit report?
A: If you notice an unexpected issue with your credit score, you should usually get a copy of your credit report as soon as possible, so that if there is an incorrect item on it, you can dispute it quickly. Even if your score has not changed dramatically, checking your credit report regularly is still a very good habit.
- Under the Fair and Accurate Credit Transactions Act (FACT Act), each credit bureau must provide consumers with one free credit report each year. You can get this report at www.annualcreditreport.com. A good strategy is to request a report from one bureau every four months.
- Also under the Fair Credit Reporting Act (FCRA), if you suffer an adverse action when applying for credit, such as a credit card, loan, insurance, or a rental application credit check (Denial of credit/employment/insurance, adverse action), you can request a free report from the credit bureau within 60 days. For example, if your credit card application is denied, that qualifies; if you request a credit limit increase and do not receive the amount you asked for, that also qualifies; if you apply for a credit card and the credit limit is lower than you expected, that can qualify too. The links are here: Equifax, TransUnion and Experian.
- In addition, for an Experian report, once you have obtained it once, you can repeatedly access it using the report number at this link.
- Some third-party services also provide credit reports, such as Credit Karma(TU, EQ), Credit Sesame(TU), Creditcardscore(EX), Mint(EQ), Credit.com (EX), Quizzle (TU), Credit Concierge, and more.
One thing to keep in mind: if you only recently got your SSN, a credit bureau may refuse to provide your credit report online and instead require you to mail in a large set of documents to verify your identity.