When I first came to the United States, many people are a little confused the first time they hear about Credit Score: why does applying for a credit card depend on your credit score? Why is my score not high even though I have never owed anyone money? Why does Credit Karma show 760, while the number the bank sees may not be 760?

In fact, the U.S. credit system is not as mysterious as people think.

The simplest way to understand it is:

  • Credit Report is your credit file. It records which credit cards and loans you have, when they were opened, how much you owe, whether you paid on time, and who recently checked your credit;
  • Credit Score is a number calculated from that file using a certain model;
  • Whether the bank ultimately approves the card is not based on just one number. It also looks at your income, the number of new accounts, Hard Pulls, your relationship with the bank, and its own risk-control rules.

So instead of staring at your credit score every day and worrying about a 5-point gain today and an 8-point drop tomorrow, it is better to first understand the key factors in your credit report. For most people who use credit cards normally, there are really only three things to remember:

  • Pay on time every month;
  • Do not keep your credit card utilization ratio extremely high for a long time;
  • Give your credit history some time to grow.

Once you do those things, your credit score usually is not something you need to worry about every day.

What exactly are a credit report and a credit score?

The three major credit bureaus in the U.S. are:

  • Experian (EX)
  • Equifax (EQ)
  • TransUnion (TU)

Banks, credit card issuers, and lenders report your accounts and payment activity to the bureaus, so each bureau builds a separate credit report for you.

The three reports are not necessarily identical. Some banks may only check credit with one or two of them, and sometimes an account only appears at some bureaus for a while, so the three scores you see can also differ.

Common information in a credit report includes:

  • Name, address, and other personal information;
  • Credit card and loan accounts;
  • Open dates and account status;
  • Credit limits and reported balances;
  • Payment history;
  • Hard Inquiry;
  • Negative items such as Late Payment and Collection.

The first time you actually download and look through your own credit report, it is often more useful than checking your credit score all the time.

We previously walked through an actual Experian credit report on our site. Once you open it, you can see when your Discover account was opened and how much Balance was reported each billing cycle, and you can also see the Hard Pulls left by banks such as BofA, Chase, AMEX, and Citi. At that point, the very abstract idea of a "credit record" basically turns into a very concrete ledger.

Right now, through AnnualCreditReport.com, you can check your Experian, Equifax, and TransUnion credit reports for free, and all three bureaus can be viewed for free once a week.

A credit score is the result calculated from your credit report using different models.

The two names you hear most often are FICO Score and VantageScore. Many banks use FICO for credit approval, while free services like Credit Karma often provide VantageScore, so it is completely normal for the two numbers to be different.

That is also why I do not recommend panicking just because Credit Karma suddenly drops by more than ten points today. It is more important to check whether your credit report has actually changed than to stare at a single score.

What factors affect a credit score?

The exact formulas for different FICO models are not fully public, but the five major factors FICO publishes are very worth remembering:

Factor Approx. Weight Plain-English Meaning
Payment History 35% Whether you pay on time
Amounts Owed 30% Your debt and credit limit situation
Length of Credit History 15% How long your credit history is
New Credit 10% Recent new accounts and credit checks
Credit Mix 10% Types of accounts such as credit cards, mortgages, and auto loans

But you do not need to memorize those percentages. I would rather you understand the logic behind them.

  • Payment History: The most important factor. Paying on time normally is far more important than studying all kinds of so-called "credit-building tricks."
  • Utilization: If your total credit limit is only $5,000, but $4,500 of Balance is reported for a long time, the bank will think you rely heavily on your credit limit.
  • Credit History: The U.S. credit system cares a lot about time. A normal old card that you have held for many years is itself very valuable credit history.
  • New Credit: Applying for many credit cards in a short period creates new Hard Pulls and new accounts, and your score may drop temporarily.
  • Credit Mix: Having different types of credit accounts may help, but there is absolutely no need to take out a loan just for Credit Mix.

Here is a very real example.

Our site author's first Chase Freedom card had a limit of only $800, and later it slowly increased to $1,500, then to $4,300, and eventually to more than $6,000. This process is actually very typical: at the beginning, when your credit history is short, the bank is only willing to give you a small limit; after several years of normal use and on-time payments, the bank's trust in you and your total credit limit usually both increase gradually.

So if your first card in the U.S. only gets a $500 or $1,000 limit, there is really no need to dislike it. For newcomers, building your first stretch of credit history is much more important than whether your first card is a "great" card.

How do you build and improve a credit score?

There are many tips online about "building credit," but the methods that really work over the long term are actually very simple.

First, pay on time.

It is best to set up AutoPay on your credit card directly, at least so you do not leave a Late Payment behind just because you forgot to pay the Minimum Payment. Under normal circumstances, if your cash flow allows it, I would suggest paying the full Statement Balance every month. There is no need to pay the bank interest on purpose just to improve your credit score.

Second, do not keep Utilization extremely high for a long time.

Suppose you only have one credit card with a $1,000 limit, and you happen to charge $900 in a given month. If the credit report shows 90% Utilization, a short-term drop in your score is not surprising.

That does not mean your credit has gone "bad." If it is just a normal large purchase, and you pay down the Balance afterward, the amount reported in the next cycle will drop, and the score will usually adjust again too.

So if my credit score sometimes moves up and down because of Utilization, I generally do not worry about it too much.

Third, let your credit history grow naturally.

Someone who has only six months of credit history in the U.S. will still have a much thinner credit file than someone with more than ten years of credit history, even if every bill is paid on time. There is no shortcut for this. Time itself is part of your credit record.

Fourth, do not do too many strange things just to gain a few points.

For example, taking out a loan you do not need just for Credit Mix, or paying an extra $20 or $50 early every day based on credit score changes, are both things I think are unnecessary.
The purpose of a credit score is ultimately to help us get better credit card and loan terms, not to treat an 800 score as a game achievement.

If you have just arrived in the U.S. and your credit history is almost blank, you can also consider Authorized User.

For example, if a family member has a credit card that has been open for many years and is paid on time, adding you as an Authorized User gives that account a chance to appear on your credit report. However, AU does not mean you personally have the full credit history of the primary cardholder, and banks can identify Authorized User status when reviewing applications, so it is best used as a supporting tool and should not be misunderstood as "adding a sub-card means instant credit graduation."

New immigrants and international students without an SSN are not completely unable to start building U.S. credit. Depending on your situation, you can look into ITIN, Secured Card, Authorized User, and credit cards that accept ITIN.

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How does applying for a credit card affect credit?

Applying for a new credit card usually affects your credit report in two stages.

Step one is Hard Pull.

After you submit an application, the bank will usually check one or more credit reports from Experian, Equifax, or TransUnion, and this inquiry will leave a Hard Inquiry.

A Hard Pull may cause your credit score to dip a little in the short term, but for people whose credit history is already fairly mature, one or two normal Hard Pulls usually are not something to worry about too much.

Step two is the new account appearing.

If the credit card is approved, the new account will appear on your credit report after some time. It may bring two opposite effects at the same time:

  • a new account lowers your average age of accounts, which is unfavorable to your score in the short term;
  • the added credit limit may lower overall Utilization, which helps your score.

So after applying for a new card, your credit score does not necessarily change according to a fixed formula like "lose X points."

We have analyzed this process in detail before. When you first apply for a new card, your score may dip slightly because of the Hard Pull; after the new account appears, because both average age and total credit limit change, the score may go up, stay flat, or continue to edge down; over several years, an older account with a clean payment history actually becomes part of your credit history.

Business credit cards are a little different.

Many mainstream business credit cards do not continue to appear on your personal credit report during normal use, so after approval they usually do not add a new personal account the way a regular personal card would. But policies vary by bank and product, and Capital One Business in particular needs to be confirmed on a product-by-product basis.

What should you do about late payments, card closures, and negative records?

What really matters is not that your credit score dropped by 8 points yesterday, but whether negative items such as Late Payment or Collection show up on your credit report.

We have even made a classic small mistake ourselves.

In 2021, one of our site authors really forgot to pay a credit card once and discovered it when the account was already Past Due for about 3 to 4 days. After noticing it, the payment was made immediately, and later when the credit report was checked, there was no sign that those few days of lateness had been recorded as Past Due.

This is a great example of an important concept:

Missing the Due Date and having a 30-Day Late item appear on your credit report are not the same thing.

Being a few days late may already trigger a Late Fee, interest, or Grace Period issues, so you still need to handle it right away; but banks usually do not report a 30-Day Late to the credit bureaus just because you are one or two days late.

If it has already been more than 30 days, that is a completely different story. 30-, 60-, and 90-day Late Payments will have increasingly serious effects on your credit history, and negative records may last for many years.

If your credit report already shows an incorrect Late Payment, an unfamiliar account, or any other record that does not belong to you, do not assume you just have to accept it.

First pull all three credit reports to confirm exactly which bureau has the problem, then file a Dispute with the relevant bureau and the organization that provided the information.

Many people also worry that closing an old credit card will instantly make their entire credit history disappear.

In reality, it is not that dramatic. Closing an account may reduce your total credit limit, which can increase Utilization; but a previously open account that is in good standing does not disappear from your credit report the moment you close the card.

If your credit history is long and you already have many accounts, the long-term impact of closing one card is usually not as big as newcomers imagine. On the other hand, if you only have two cards and one of them holds most of your credit limit, the short-term impact after closing it may be more noticeable.

How do you check and manage your credit record?

I think once you start managing credit cards strategically, you should at least get into the habit of checking your credit report occasionally.

This is not about checking your credit score three times a day, but about reviewing things from time to time:

  • whether there are any new accounts you do not recognize;
  • whether the account balance and credit limit contain obvious errors;
  • whether there are any unusual Late Payments;
  • what Hard Pulls you have had recently;
  • before you apply for Chase, how many personal new accounts you currently have.

For now, the most important official entry point is still AnnualCreditReport.com, which allows you to get free credit reports from Experian, Equifax, and TransUnion.

I recommend downloading them and saving a PDF copy right away. If you look back one or two years later, it becomes very easy to see how your credit history was built little by little.

You can check your credit score through a bank, a credit card company, or a third-party service.

One important thing: make sure you know whether the score shown is FICO or VantageScore.

For example, Credit Karma is useful for a quick look at changes in your TransUnion and Equifax reports, accounts, and Hard Pulls, but the score it shows is not the FICO Score that every bank sees when reviewing an application.

If you find a completely unfamiliar account or Inquiry, don't just think about how to get your credit score back up; first confirm whether it is a reporting error or identity theft. That is where the true importance of your credit report lies.

Other common questions and articles about credit history

Once you understand the logic above, you can actually judge most questions about credit scores on your own.

Here are a few more issues that come up often when using credit cards.

One more mistake that beginners tend to make very easily:

Don't play the credit card game just for your credit score.

Your credit score is only a tool.

When we first come to the U.S., we may care a lot about going from 680 to 700 or dropping from 730 to 720; after doing this for a while, you'll realize that as long as your credit report is clean, there are no Late Payment marks, your debt ratio is normal, and your history is long enough, losing ten or so points now and then because you opened a new card or made a large purchase usually is not a big deal.

What really matters is this: when you need to apply for a credit card, auto loan, or mortgage, do you have a healthy, accurate credit record that can stand up to a bank's review?

Pay your bills on time, check your credit report once in a while, and let time do the rest.

Beginner's Guide Series

Read these posts, and you'll be ahead of 90% of Chinese Americans in the U.S.