Can someone explain to me how the credit score system in the US works?

[kms]

So I've finally gotten around to checking our credit scores. The preface here is that my wife and I have moved to the US from Germany recently (officially immigrated in June 2015 but have been travelling around the world until June 2016) and we've have received our social security numbers in early July 2015. We are debt free, and credit scores obviously don't carry over from one country to another. Especially since Germany doesn't even have a credit score of any kind.

Either way, we've checked our scores and there's a significant discrepancy between hers and mine. According to creditkarma mine is 655 whlie hers is 733. Like I said we both started out with a blank page in July 2015 and haven't really done much differently since. We have a joint bank account with one VISA credit card each (we were both rejected at first but the bank offered her a secured credit card, and I was offered a regular one two months later), and I have an American Express account with her as secondary card holder, so we have one credit card each as well. We've always paid off all cards on time, most of the time long before the amount was actually due. Recently, we've gotten into the habit of balancing our cards every two weeks.

While my wife has never lived in the US before I have, but I was going to grad school on an F-1 student visa. Back then I didn't get an SSN but an ITIN instead. Apparently that was necessary because I was receiving money from a scholarship fund to pay for tuition, housing, etc. As far as I know there's no link between them and even if there was it'd be to my advantage since I didn't have any debt back then either. I also didn't have any credit cards, only a Chase checking/savings account with an associated debit card. Once or twice I had to pay overdraft fees since I cashed a scholarship check too late or because the direct deposit was a day late, but we're talking about single digit, maybe low double digit dollars overdraft here.

There are three things that I did which my wife didn't, and I'm note sure whether or not these had an influence on my credit score.

1) I've opened a bank account with Charles Schwab in June 2016 through their website but could not provide sufficient proof of identity because I did not have a US issued driver's license yet and we were subletting a room at a buddy's place, so we didn't have anything to prove we actually lived where we claimed to live. I thus had to close that account again without ever getting to use it a month later.

2) When we bought our car in June 2016 the dealer made us an offer for financing the car rather than paying cash for it. It was a horrible offer - the car would have ended up costing us more than twice what we paid for in cash - so we obviously didn't take it but it was in my name nonetheless. I don't remember what bank they went through and I'm not yet that familiar with how the entire system works here. The title is also in my name if that makes a difference.

3) In June 2016 I ordered something from Amazon. They had an offer where I could've saved $60 on my first order if I applied for their VISA credit card and used that to pay for my order, which I did. My application was rejected, however, and I ended up having to pay full price for my order usinga different credit card.

Is it possible that these three incidents (or any one of them) may have caused the dip in my credit score? Is there another explanation why my wife and I both started on the same day yet her score is significantly higher than mine? And, more importantly, what can we do to build as much credit as fast as possible? We're thinking about buying a house in late 2017 or early 2018, and my understanding is that the better our combined credit score the better the offers for financing said house will be. We need to get a second car (used) in February which I would be willing to finance and pay off in three to six months if that'd help improve my credit score. I could even finance it then pay off the entire amount the next day if that would help.

Any input would be greatly appreciated.

[secondcor521]

I'm not sure why your scores would differ.  The short but unhelpful answer is because something in your credit reports is different.

A slightly less short answer would be for both of you to sign up for an account on creditkarma.com.  You can then look at your reports side by side and see what differences there are.  Credit Karma also has some good explanations as to what items in your credit report matter and to what degree they matter.  These analytics should also point you to what activities you need to focus on.

Since there is a large discrepancy in your scores, I would venture to guess that there is a derogatory mark on your report somewhere; possibly dating back to when you were here earlier for grad school.  It is quite possible that your bank made a derogatory mark regarding the checking overdraft.  If that is the case, you will want to work with that bank to see what they would want you to do to possibly remove the mark.  That is probably the single best thing you can do to improve your credit score quickly.

Getting a car loan and paying it off over the course of a few months would in all likelihood help your score.  I have heard that having different types of debt helps improve your score.  Before going this route, you would want to confirm with the lender that they report to the major credit bureaus - all the major ones do, but some buy-here-pay-here type places might not.  Getting a car loan and paying it off the next day may not get reported - I'm not sure; I've never done that.

If it's any consolation, my wife always had a slightly higher credit score than I did, even though I brought home all of the income and she was a SAHM.  Never understood that.  Oh well.

Good luck!

[lbmustache]

The exact methodology is unknown (of course *roll eyes*) but the breakdown is generally:

35% payment history, 30% amount owed, 15% length of history, 10% new credit, 10% types of credit used.

Part of your credit score is based on timely payments. So financing a car and paying it all off the next month doesn't show that you can make timely payments. It also sounds like the length of your history is pretty short if you're mentioning incidents in June 2016 and only 2016.

The interest rate on the car was high because of your credit score. So of course paying cash was the logical and mustachian thing to do, but it doesn't actually help your credit score. :)

Being rejected for a credit card is two-fold, one it is a "hard pull," on your credit, and that lowers your score more than a soft pull. Two, although credit reports don't show the "rejection," anyone can see that Amazon/Visa pulled your credit, and your line of available credit didn't increase (thus coming to the logical conclusion that you were denied the card). Kind of the same thing with the car loan you rejected, although that's affecting you more on the hard pull side.

AFAIK, debit overdraft fees don't affect your credit score (I could be wrong). Having no debt is actually detrimental to your credit score (of course *roll eyes*) - basically the bank looks at it as, "how can we lend you money (debt) when we have no idea how you would handle said debt?" I don't know how high your current credit card limits are, but if you can increase them, that will help your credit.

If your credit score is much lower than you think it should be, I would run a credit report to make sure your identity hasn't been stolen.

[Nothlit]

It sounds like all you did was check your credit score, but have not actually seen your credit report(s). If that's the case, you should pull copies of your credit reports from the 3 major credit reporting companies - Experian, Equifax, and TransUnion. The best way to do this is through the official annualcreditreport.com web site which entitles you to a free copy of your report from each company once per year. (Beware there are other scammy sites out there with similar URLs that will sign you up for some sort of paid credit monitoring service. Avoid those.) Some people spread it out so they get 1 report from a different company every 4 months, or you can get all 3 at once, or whatever combination suits your needs. Your credit report will enable you to see the factors that are going into calculating your credit score, even if the exact scoring algorithm remains a mystery.

CreditKarma.com is another resource, which is a free site that lets you keep tabs on your credit report & scores on an ongoing basis. However, CreditKarma only pulls data from Equifax and TransUnion, so you'd be missing any Experian data if you only use CreditKarma. Also CK uses the "VantageScore" model, which is different from the FICO scoring model that is typically used by lenders.

If I had to guess, I'd say your score is likely lower than your wife's due to the additional inquiries that have occurred on your account and not hers: the car loan (even though you didn't take the loan, the inquiry still appears on your report for 2 years) and the Amazon card that was denied.

[soccerluvof4]

https://www.valuepenguin.com/credit-scores   Kind of explains it all generically 

[kms]

Thanks a lot, this has already been very helpful.

The reason why there are incidents in 2016 only is because we have only really moved here in June 2016. We were out of the country between early July 2015 and mid June 2016 so there's nothing to report there. I also highly doubt my identity has been stolen already since, once again, we've only just moved here and I am very careful and diligent when it comes to my SSN. We also obviously already do both have accounts on Credit Karma, which is where I checked the scores in the first place. I didn't know they had detailled reports on our credit history, too. Apparently we both have 100% payment history, 0 derogatory marks, an average age of credit history of 5 (wife, 5 months AMEX + 5 months VISA) and 3 months (me, 5 months AMEX + 1 month VISA), respectively, and we both have two accounts each. I do, however, have three credit inquiries on my account that are classified as hard pulls, one of which is actually Charles Schwab back from June 2016. Neither the auto loan nor the Amazon credit card are listed, though. My wife only has one credit inquiry on her credit history.

From what I understand I can really only work on one area right now: my available credit. The detailed report says I'm using a total of 52% of my available credit on both my credit cards combined. Apparently, that puts me in the red category and I should try to use anywhere between 0-29%. This apparently also has a rather high impact on credit score. Should be an easy one though since now that we've started paying our cards off every two weeks instead of once a month after the statement was in there shouldn't be any significant amounts left on the monthly statements. It's odd that those are listed as credit card debt though, from my understanding they're only debt if I fail to pay them off and carry them over into the next billing cycle but apparently I got that wrong o_O I will try and increase the credit card limits though, that seems like a smart thing to do.

The other thing that worries me are the credit inquiries. Let's say I do get a car loan and make my payments every month. In theory, that should increase my credit score, correct? I will, however, get another hard pull on my credit inquiries in that case. From my understanding the high impact payments history should counterbalance the low impact credit inquiry, correct?

Fun fact: apparently the number of accounts is also a downer for us. We only have two accounts each, which puts us in the red category. In order to turn that one green we would need at least 11 accounts, which means another 9 credit cards each. This can't be right, can it?

[MilesTeg]

Any input would be greatly appreciated.

Applications for credit without a corresponding credit account do hurt your score. If you applied for the car loan but did not take it, they assume you were denied and your score gets lowered.

Never apply for credit unless

a.) You want to take it
b.) You are pretty sure you won't get rejected.

Mostly you history of

1.) Having credit
2.) using it responsibly (i.e. no late payments, no collections, no public records of failure to pay, etc.)

are the main factors. Primarily what you need is to have and use lots of credit of different types. Credit cards, car loans, home loans, student loans, personal loans, etc.

The best thing you can do to figure out what your best moves are is to sign up for creditkarma.com or www.creditsesame.com They are free (ad supported) services that pull your credit reports and scores (for free monthly) and give you a run down of what is hurting your score and what you can do to improve it, including some 'credit simulators' that would help you figure out what to do, such as if getting a new credit card will help your score.

For your house, you want to aim for at least an 740 average FICO8 score to get the best rates. Lenders will typically use either a mean average or will use the median average (i.e. from the 3 bureaus they will drop the highest and lowest score leaving 1/3). Importantly, there is no singular credit score. There are many different scores. Vantage, FICO, and others that lenders use. And, within the various types, there are several different versions of the score. For example, the latest and greatest FICO is FICO version 8. You never really know which score a particular lender might use so try not to focus too much on score and just do the things that will improve _all_ your scores (see the websites I linked).

For you, what you need is to prove you can use credit responsibly, which means getting and using some. You have effectively no history, few accounts, etc. and that's what's hurting most.

[Digital Dogma]

Disregard CreditKarma's "number of credit lines" suggestions, this is a company that makes its money by referring you to credit card offers!!!

Thats not to say it does not matter, just that you're not necessarily doing yourself a favor by getting the recommended 17 credit cards so that category goes from red to yellow or green.

I would recommend that perhaps you get your hands on a starter card, like a capital one card with a low credit limit, and make an effort to put a purchase or two on it each year to keep it open (and pay it off in full, obviously). This will do two-fold for your score - it adds a line of credit, and it reduces your credit utilization by increasing your maximum credit limit. That will improve your score over time, and you'll be eligible for better credit cards (with rewards, points, etc), which will naturally reduce your credit utilization (because you pay them off in full) and improve your score further. IMO, after you've had a few open lines of credit and you pay them off every time, your credit score will naturally increase over time due to your excellent payment history.

[MilesTeg]

I didn't know they had detailled reports on our credit history, too. Apparently we both have 100% payment history, 0 derogatory marks, an average age of credit history of 5 (wife, 5 months AMEX + 5 months VISA) and 3 months (me, 5 months AMEX + 1 month VISA), respectively, and we both have two accounts each.

This is the biggest detriment. 5 _years_ is usually considered the minimum "decent" credit history. And, importantly, that number is calculated against only OPEN account, not closed accounts. For example, my current age/history is only 4 years, even though I've had a credit card for almost 20. That's because I (accidentally) let my oldest credit card account get cancelled from lack of use and because I've opened several new accounts in the last year. The lesson: don't close old credit cards and keep them active.

I do, however, have three credit inquiries on my account that are classified as hard pulls, one of which is actually Charles Schwab back from June 2016. Neither the auto loan nor the Amazon credit card are listed, though. My wife only has one credit inquiry on her credit history.

Three hard pulls is a detriment, but they will stop affecting your score 1 year after the date of the pull. Don't apply for new credit unless you want it.

From what I understand I can really only work on one area right now: my available credit. The detailed report says I'm using a total of 52% of my available credit on both my credit cards combined. Apparently, that puts me in the red category and I should try to use anywhere between 0-29%. This apparently also has a rather high impact on credit score. Should be an easy one though since now that we've started paying our cards off every two weeks instead of once a month after the statement was in there shouldn't be any significant amounts left on the monthly statements.
It's odd that those are listed as credit card debt though, from my understanding they're only debt if I fail to pay them off and carry them over into the next billing cycle but apparently I got that wrong o_O I will try and increase the credit card limits though, that seems like a smart thing to do.

The best place to have your load is between 5-9%. 0% is bad, >9% is bad. And it's not just funds that are over 30 days old, it's your total current balance. Your creditors report your balance vs your limit monthly (or maybe even more often). This is actually good if you are paying your total off every month, as it looks like you are using credit even though you technically aren't.

If you are paying off monthly and still going above 10% you need to either get more cards, or ask for a credit limit increase. Aim for whatever revolving credit limit allows you to stay under 10% through normal monthly usage. When you buy the house, it will be very important to keep your usage below 10% as most lenders will recheck your credit the day before closing and if your score drops due to over-usage the deal may fall through.

In general, don't do anything to lower your credit even after getting a mortgage approval because they WILL check it again even after approval.

The other thing that worries me are the credit inquiries. Let's say I do get a car loan and make my payments every month. In theory, that should increase my credit score, correct? I will, however, get another hard pull on my credit inquiries in that case. From my understanding the high impact payments history should counterbalance the low impact credit inquiry, correct?

Hard inquiries only affect your score for one year, and their effect diminishes even in that year. Don't sweat inquiries if you are actually trying to get credit. Also, if you are shopping around for a loan and get several inquiries in the space of a couple days they only count as one. So if you do shop around, figure out the lender candidates and apply all on the same day.

Fun fact: apparently the number of accounts is also a downer for us. We only have two accounts each, which puts us in the red category. In order to turn that one green we would need at least 11 accounts, which means another 9 credit cards each. This can't be right, can it?

That is correct. I have 15 accounts, and that's only considered fair. It's about history. The more history, the better. However, don't do apply for 10 more credit cards, as that won't help. The score considers the type of account as well. You need a mix of loan types.

Your biggest issue right now is
1.) extremely poor history (5 months) -- this affects both your "length of history" factor and your "payment history", with the latter being the biggest single factor.
2.) not enough accounts or TYPES of accounts.

You said you were looking to buy a car. When you do, if you still need to improve your score, finance it even if you have the cash for it. Even if it makes the car much more expensive. But also make sure the payment is <5% of your gross, as a high car payment will also hurt your chances for a mortgage. Lenders typically will only allow housing debt (mortgage, tax, insurance) payments of up to about 28% of your gross with total debt payments of 36% of your gross.

A high interest car loan sucks, but a high interest mortgage sucks at least an order of magnitude more. It will establish some history and variety to your credit. Or get a student loan or something other than just a credit card (revolving debt) to establish some history.

Like I said in my last post, a good target is 740 average. That or above gives you good rates on a mortgage, below that gives you worse rates.

[kms]

For you, what you need is to prove you can use credit responsibly, which means getting and using some. You have effectively no history, few accounts, etc. and that's what's hurting most.

Right, that sounds reasonable.

The car I will definitely try to finance. Is it better to go through the dealer or the bank for an auto loan?

In addition to the car purchase there's another rather large(ish) purchase awaiting: I need to buy a new laptop for work somewhen around February/March. It'll either be a MacBook Pro or a Lenovo Thinkpad. Either way, it will be somewhere between $2,000-$3,000. I was planning on paying cash but it sounds like it would make much more sense to get it financed instead, correct? The only problem is that if I do apply and get denied it'll hurt my credit score even more so I'm a bit worried about that. I know that both Apple and Lenovo do financing so it would in theory be possible to do it through them instead of a personal loan with a bank. Personal loans seem rather pricey to me, at around a 15-25% APR which would make the laptop way more expensive than I am willing to fork out.

I like the idea of an additional credit card simply for reducing credit utilization. I'll look into that, thanks.

[lbmustache]

For you, what you need is to prove you can use credit responsibly, which means getting and using some. You have effectively no history, few accounts, etc. and that's what's hurting most.

Right, that sounds reasonable.

The car I will definitely try to finance. Is it better to go through the dealer or the bank for an auto loan?

In addition to the car purchase there's another rather large(ish) purchase awaiting: I need to buy a new laptop for work somewhen around February/March. It'll either be a MacBook Pro or a Lenovo Thinkpad. Either way, it will be somewhere between $2,000-$3,000. I was planning on paying cash but it sounds like it would make much more sense to get it financed instead, correct? The only problem is that if I do apply and get denied it'll hurt my credit score even more so I'm a bit worried about that. I know that both Apple and Lenovo do financing so it would in theory be possible to do it through them instead of a personal loan with a bank. Personal loans seem rather pricey to me, at around a 15-25% APR which would make the laptop way more expensive than I am willing to fork out.

I like the idea of an additional credit card simply for reducing credit utilization. I'll look into that, thanks.

No, do not finance the laptop. You can put it on a credit card and pay it off.

Going through the dealer or the bank depends on who you think can get you the best rate and whether you're buying new or used. Used cars typically have a higher interest rate regardless.

For example, Toyota (with a 720+ credit score) can get you a new car with 0% financing right now. I don't think any bank will be able to match that.

[Goldielocks]

Credit inquiries and the joint card like is only reported on o e of your names. The hard plump on your credit check does disappear in impact fairly quickly though.

[katsiki]

Stay away from retailer cards (for the laptop purchase or anything else).  They are rated lower than other CCs.

[kms]

So, to sum it up this is what I can do right now:

1. Get at least one more credit card and use it once or twice a year, then immediately pay it off. This should increase my credit limit and thus lower the use of my available credit on my credit cards. It will also mean I'll have additional accounts on my credit history.

2. Make sure my credit cards are mostly paid off before the end of the billing cycle. That way when the bank issues the monthly statement and reports my 'debt' to the agencies it will be significantly lower than it was in the previous months. I will try to keep the load between 5-9% of my available credit each month even though I have never missed a payment and have always paid off 100% of my credit card 'debt' each month regardless of whether the load was 5% or 95% over the course of a billing cycle.

3. Increase the credit limit on my existing credit cards, which should also lower the use of my available credit.

4. Do not finance the laptop but put it on my credit card instead. Would it have a positive effect on my credit score to carry this debt over a month or two and make regular payments each month (say, for example, I spend $2,100 and make a $700 payment each month) or would it be better to pay it all off right away before the bank issues the monthly statement and reports my 'debt'?

5. Finance the car. We will definitely not get a new car so 0% financing will not be available to us, but I'll look into financing options in due time.

6. Wait and make sure to make all payments on time.

[dogboyslim]

Also pull your report from all three bureaus.  You can get this free once every 12 months here: https://www.annualcreditreport.com/index.action.

Check it and make sure there are not any mistakes on the reports.  If there are, dispute them and work through getting them removed.

[Dave1442397]

5. Finance the car. We will definitely not get a new car so 0% financing will not be available to us, but I'll look into financing options in due time.

When you get around to financing a car, try the credit unions for better rates. PenFed.org is the one I use. Anyone can join PenFed by contribution $20 or so to the National Military Families Association. They also seem to be easy to deal with if and when you get a mortgage.

[Digital Dogma]

5. Finance the car. We will definitely not get a new car so 0% financing will not be available to us, but I'll look into financing options in due time.

When you get around to financing a car, try the credit unions for better rates. PenFed.org is the one I use. Anyone can join PenFed by contribution $20 or so to the National Military Families Association. They also seem to be easy to deal with if and when you get a mortgage.

I second this suggestion and was going to post the same thing this morning before I left for work!

My SO secured financing through Navy Federal because she has two Marines in her family. They pre-approved her for a certain price range, and we were able to tell the dealer we were not interested in their financing options in order to negotiate a fair price for the vehicle. We didn't even mention the credit union financing until payment was discussed upon vehicle delivery, all we did was put money down to secure the sale/delivery. The financing guy complained a bit about paperwork or something, but thats what the conveyance fee is for right?
My only knock on Navy Federal was their lack of locations in my area, we had to address a few document requests electronically during a time when we didn't have a scanner.

All in all, unless you can do better than ~2% financing its probably a great idea to check out your local credit unions.

[MilesTeg]

So, to sum it up this is what I can do right now:

1. Get at least one more credit card and use it once or twice a year, then immediately pay it off. This should increase my credit limit and thus lower the use of my available credit on my credit cards. It will also mean I'll have additional accounts on my credit history.

2. Make sure my credit cards are mostly paid off before the end of the billing cycle. That way when the bank issues the monthly statement and reports my 'debt' to the agencies it will be significantly lower than it was in the previous months. I will try to keep the load between 5-9% of my available credit each month even though I have never missed a payment and have always paid off 100% of my credit card 'debt' each month regardless of whether the load was 5% or 95% over the course of a billing cycle.

3. Increase the credit limit on my existing credit cards, which should also lower the use of my available credit.

4. Do not finance the laptop but put it on my credit card instead. Would it have a positive effect on my credit score to carry this debt over a month or two and make regular payments each month (say, for example, I spend $2,100 and make a $700 payment each month) or would it be better to pay it all off right away before the bank issues the monthly statement and reports my 'debt'?

5. Finance the car. We will definitely not get a new car so 0% financing will not be available to us, but I'll look into financing options in due time.

6. Wait and make sure to make all payments on time.

Yep, time is what you need most.

Don't finance a laptop.

Don't bother with carrying balances over on the laptop when you buy it on a CC. With a revolving credit line (like a credit card) the only thing that matters is whether or not you pay on time and what your utilization % is. No reason to pay the interest. And don't get too caught up in what I said about keeping your balances low. The only balance that matters to your score is the most recent balance. They don't track your balance history or anything. So just make sure it's there when you apply for credit (and if it's a mortgage, up through closing approval is contingent on still being in good shape when you close). You can use credit karma or similar to verify your utilization being reported before you apply.

When you finance the car, remember you don't have to finance the whole thing or even most of it. Just finance some of it, especially if the rates available to you are steep.

Also, don't bother with a credit line increase, you have to apply for them just like a new card, which means a hard pull and a possible rejection. Much better to wait for a pre-approved offer in the mail on a no yearly fee card.

[MilesTeg]

5. Finance the car. We will definitely not get a new car so 0% financing will not be available to us, but I'll look into financing options in due time.

When you get around to financing a car, try the credit unions for better rates. PenFed.org is the one I use. Anyone can join PenFed by contribution $20 or so to the National Military Families Association. They also seem to be easy to deal with if and when you get a mortgage.

Yes, I can't recommend credit unions (in general, still need to do due dilligence!) enough. They remove a significant source of financial drain (typically no fees and lower rates available) and are typically much more customer errr, member focused rather than profit focused. The problem is the banking cartels make it difficult to join a credit union.

[Enigma]

People build credit over time.  Every little action you take with a short history will adversely affect your credit.

Hard pulls - Try to limit to 5 hard pulls at any given time. They go after being on your credit for 5 years.

[kms]

I've wanted to thank y'all for your help and also give you a quick update.

With all your help and your tips my wife and I have managed to boost our credit scores past 750 in the months between January 2017 and August 2017. In the end, my credit score was completely worthless because given that I am self-employed I would have had to produce tax returns for the last two years. Problem is we haven't been in the US long enough yet meaning that only my wife ended up on the mortgage.

Either way: we've found a good house for a reasonable price in a really nice neighborhood. Thanks again for all your help.