Dear Opening Credits,

I have just been to the United States and know almost nothing about credit scores and reports. I have a couple of questions: Do I need to open credit report account, or when I get a credit card is my information automatically gathered and sent to the credit bureau? Although I have had a credit card for around two months and have done a couple of on-time payments, I am quite new to the States. What would my credit situation be at this point in time -- is it poor, fair, good or what? Would I even have a credit score? And what would that be? 

- Sear 

Dear Sear,

Ever been with someone who is driving around lost, but who refuses to ask for directions? It's a ridiculous waste of time and fuel! For this reason I'm glad you have reached out and asked these questions. The last thing I want you to do is make a wrong turn or circle your target without ever arriving.

Here's what you need to know.

There are three major credit reporting agencies (CRAs, often called credit bureaus) in the United States: TransUnion, Experian and Equifax. While they are separate, private companies, each does the same thing, which is to take the information provided to them by banks, credit unions, credit card companies, collectors and the courts, and then compile that information into readable reports and an algorithm that generates a credit score.

As an individual, you do not have to do anything to start the reporting process other than borrow and repay money via credit cards or most types of loan (such as for a car or mortgage). When you do, the information supplier automatically and regularly sends updates to the three CRAs about your payments, how much you owe and the total amount of credit you've been approved for.      

When you applied for your credit card account, the creditor sent notification to the CRAs and an inquiry was placed on your newly created report. Then, after you were approved for the credit line, the issuer began to send detailed information about the account to the credit bureaus. If you were to pull your reports today, you would see such activity as:

  • The date of the credit inquiry
  • The date the account was granted
  • Your credit line (sometimes referred to as a credit limit)
  • Your current balance
  • Your monthly payment pattern

CRAs do not judge whether you are a good or bad credit customer. Other lenders and businesses determine that. They might check your credit report to see how you've been doing either to try to sell you on a product or if you apply for another card or loan, as the past is a predictor of the future. Or they may choose instead to access your credit scores.

A credit score is a numerical rating of the information on a credit report. The most commonly used score is the FICO, which was developed by FICO, then called Fair Isaac. It ranges from 300 to 850, with higher numbers being preferable, as they indicate less lending risk.

If you were to get your score today, you may find it to be on the low end of the scale. Why? Because you have not had the opportunity to establish a long and positive relationship with credit.

Yes, you've paid on time, but having only two billing cycles behind you is not enough to build a great score. Continue to use your credit card in positive ways by charging often, keeping the balance very low (less than 30 percent of your credit limit on the card) and paying on time, and your rating will climb. A FICO score that is 750 and above is considered excellent, so shoot for that. Another way to get there is to open another type of account (a retail or charge card or personal loan) and also keep that in good standing.

My recommendation is to maintain a map of your progress. Get a copy of your credit report (free from annualcreditreport.com) and your current FICO score (about $20 per report) in about six months. This is your starting point. Check both again in another six months. You should note increased activity on the report, and higher FICO scores. Repeat the process again after a full year has gone by. By ensuring that your creditors are only reporting fantastic data, your reports and scores will take you where you want to go: on the road to high scores, with no crashing into expensive debt, payment delinquencies and collection activity.

See related: FICO's 5 factors: The components of a FICO credit score