Understanding Credit Scores in the USA: A Newcomers Guide
Understanding credit scores in the USA can be challenging. These scores affect almost every aspect of your life, from renting an apartment to getting a job or simply being able to shop online easily. With a good score, you can qualify for lower rent, better interest rates on credit cards or student loans, and show potential employers that you are financially responsible so they know you’ll be a trustworthy worker.
In short, it’s well worth the time and energy to understand credit scores. Our goal at Upwardli is to make it easier for you.
What is a Good Credit Score?
A credit score range is typically measured on a scale of 300-850, known as a FICO score. A “good” credit score is generally considered to be 700 or higher. A score of 800 or more is considered exceptional.
Americans had an average credit score of 710 in 2020, 7 points higher than 2019. There are a number of services out there that will help you to monitor your score and even look for ways to boost your score. Wondering how to build credit without a credit card? Read more here.
What is the Difference Between a Credit Score and a Credit Report?
Although closely related to one another, a credit report and credit score are two separate components of your financial reputation.
Credit Report
Think back to your school record: it shows which courses you’ve taken, your grades, attendance, absences, and other notes about your behavior. It shows universities whether you are likely to succeed as a student there, based on your past performance.
A credit report is similar. But instead of showing your academic performance, it documents your financial performance. A credit report notes past payments on bills and debts, whether your payments were on time, missed payments, the current amount of debt you’ve taken on, and more.
When you apply for a loan, apartment, credit card, or other financial services, decision-makers will request a copy of your credit report to determine whether you are likely to pay them on time and in full.
Credit Score
Your credit score is based on your credit report. It’s a quick number that lenders and other decision-makers will look at before even taking a deeper look at your credit report.
There are five factors used to calculate your score, each weighted differently:
Payment history: 35%
Credit utilization ratio: 30%
Credit history length: 15%
Number and types of credit: 10%
Account inquiries: 10%
As you can see, the first two factors are more important than the other three, and you have the most control over them.
How Do I See My Credit Report or Credit Score?
You can request a free credit report once per year from each of the three credit score agencies in the US: Equifax, Experian, and TransUnion. Essentially, this means you can get three free credit reports each year. As a result of COVID-19, AnnualCreditReport.com is offering free weekly credit reports through April 2022.
You may also have access through other accounts such as Upwardli or if you have a bank account, you may be able to access your credit score more quickly and conveniently. Many financial institutions allow you to see your credit score through their online systems, with one simple click.
How Many Points Does Your Credit Score Go Down for an Inquiry?
Whenever you authorize someone to pull your credit report-- for example, when you apply for a car loan-- your credit score goes down slightly.
For someone with an established history, a credit inquiry usually lowers the score by less than 5 points. But for someone without a long history or without many different types of credit open, the inquiry can cause a much larger drop.
Fortunately, the decrease isn’t permanent. As long as you continue paying bills on time and keeping a low credit utilization ratio, your credit score should go back to normal in a few months.
Does Checking My Credit Report Make My Credit Score Go Down?
Fortunately, you can check your own credit report without negatively impacting your score. This type of request is considered a “soft inquiry.” There are many services available that allow you to check your credit score for free. Services like Upwardli also will provide you with action plans and recommendations on how you can improve your score.
Soft Inquiries
Soft inquiries include activities such as:
You checking your own credit report
A potential employer pulling your credit report as part of its screening process
A credit card company checking to see if it should send you an offer in the mail
A bank or credit card company checking your report to make your FICO score easily accessible in its online system
Hard Inquiries
Hard inquiries cause a decrease in your credit score. A hard pull is usually anything involving applying for credit.
Examples of activities that generate hard inquiries are:
Applying for a personal or student loan
Applying for a credit card
Requesting an increase in your credit limit from your current credit card provider
Applying for a car loan
Applying for an apartment or mortgage
It is important to have a strategy when applying for credit cards or other services that result in a hard inquiry. Where possible, it’s best to avoid generating many hard inquiries at the same time, since this can cause your FICO score to plummet. Don’t worry, hard inquiries do not affect your credit score forever. Typically a hard inquiry will roll off after 3 years. You are also allowed to have up to 3 inquiries before you score will be more significantly impacted.
