If you are seriously considering living in the United States, you must learn some important things, such as how the credit score system works.
Lenders use this system to check the history of a potential buyer.
Some foreigners use to call this system: "credit score USA for foreigners" but in fact, it works the same way for everybody that is in the country.
What is credit score ?
Credit Score is the information that most of the lenders use to estimate if they can trust you to repay your debts on time. Basically, it is a number that ranges from 300 to 850. The higher the credit score, the better.
To buy through financing or leasing is necessary to have a good credit in the United States. You just need to follow some rules and basic guidelines to improve your credit score.
Wanna improve yours? Just keep reading to learn more...
You may have noticed in the photo above that somebody is checking his own credit score, the number 811 suggests the credit is excellent.
Understanding the credit score
Every time you need to loan money to pay for a mortgage or car, for example, your credit score is checked by the lender and goes down a little bit.
The same happens if you start using your credit card too much, the credit score will decrease when the credit card usage is increasing.
On the other hand, your credit score increases when you have a credit card but don't use it too much. Every weekly the score can have some changes.
The credit score numbers
The picture shows an example of my own credit score. It is considered good with the number 739 of 850.
You can see that there's a scale with colors and numbers and at the bottom the date my credit score was last checked (Nov 7, 2015).
That credit score information is old. I'm just presenting it here so you can have an idea of how my credit was 2 years after I arrive in the United States.
The credit score models
Your credit score report is created based on some models that will analyze the data of your financial life. Models like VantageScore and FICO.
Based on the financial information collected and by applying this model your report can show a score that ranges from 300 to 850.
There are also some proprietary models to range the score as shown below.
Very Poor: Applicants probably will not be approved for the credit.
Poor: Applicants may be approved but usually with larger down payments.
Fair: Applicants may be approved but the rates are not usually good.
Good: Applicants may be approved with good rates.
Excellent: Applicants may be approved with the best rates and conditions.
Remember the picture that shows my score ? You can see the number is 739 which is considered good by the lenders. So I have credit here in the U.S.
The credit score bureau
If you take a look at the picture again, you will see at the top that the report is provided by TransUnion.
TransUnion is the bureau.
Bureau is a company that will create a credit report based on the models I mentioned earlier or uses its own proprietary model.
There are three main credit score bureaus in the United States: TransUnion, Equifax, and Experian.
How to check your credit score for free
People free stuff, so I have good news for you. You can check your credit score for free, in fact, I always do that myself. You just need to create an account with companies that give you a free report.
There are a lot of them, some are paid and others are Free. I use Credit Karma and I think it's very easy to use.
Just don't confuse the things here, OK ? Credit Karma is not the bureau I mentioned before. But it uses the information from those bureaus.
Checking my credit score with Credit Karma
I can use a computer or a mobile App to check my credit score. I just need to log in and check my report and recommendations to improve my credit.
Credit Karma uses TransUnion and Equifax as the bureau.
As you can see I was close to the top of the scale, sometime later I got to the top (excellent) and back to the good score. (see the picture below).
The picture shows the TransUnion information about my credit score.
I'm using Credit Karma mobile App.
It reports 748 and informs that the score went down a little bit.
See the graph that shows the credit went up to 759 in the last 3 months but later went down again.
That variation can be seen over the last six months or year.
My last inquiry was on Aug 4, 2018, and I can inquiry my own credit score without making it goes down.
I think this App is very easy to use and I didn't pay anything to install it.
The changes in my score were due to the increase of my last bill for the leased car and also because I'm using a little bit more of my credit card.
The credit system tracks everything, they can see for example that I still have a bill to be paid, even after I close my account with the car dealer (Nissan).
This is the fee I have to pay when returning a leased car, it's higher than the monthly payment ( I was paying $300/month).
So, after I pay this last bill probably my credit score will improve again.
The Credit score factors
You must pay attention to the factors that will impact in your credit score.
Take a look at the picture below to see what those factors are :
Credit Card Use: As you can see my credit card use is not green because I'm using 36% of my total credit and this factor has a high impact on the score.
Payment history: For that factor, I got 100% just paying the bills on time and it also has a high impact on the score. I'm proud to be a good payer 🙂
Derogatory marks: This one is very bad with a high impact and you must avoid to have it in your records. It says that you had a serious payment problem paying a debt with a lender and can stay in your record for years.
Credit age: As long as you are in the U.S. and start your financial record your account will begin to age. Mine is just 3 Years and 7 Months on the day I'm writing this post. It has a medium impact on the score.
This one is not easy to improve, I'm still in red and it's necessary more than seven years to get a green one. Anyway, I will get there someday !
Total account: When getting a loan and create an account such as a car lease or mortgage, that means you have a new debt, so it's not good for the score to have too many accounts. It's low impact, but it counts toward the score.
Hard Inquires: Lenders inquire your credit score before approving you for a loan, so be careful to not let everybody inquiry your score because this can lower down your numbers even if it is a low impact factor.
How to improve the Credit score
When I log into the Credit Karma system I get some recommendation on how to improve my credit. Some things related to pay more of the credit card and some others related to apply for a new one.
Keep your credit card balance low
As you can see in the picture below I got a recommendation to keep my credit card usage below 30% and to reduce the balance to $290.
The overall idea is not to use too much of your credit card so you don't represent a risk, meaning you are a person that keep the bills under control.
Check the offers available
As you can see in the picture below, Credit Karma is offering me a new card with an $8,000 limit so my score can increase to 777 (It is 748 now).
But wait... Get a new credit card means I could represent a higher risk of having more debts, isn't that right ?
Yes, that's right as long as you start using it a lot that can hurt your credit score, but if you don't use it that much your number will be better.
The idea is to have the potential to expend the money but doesn't do it.
Keep the inquiring low
Every time somebody inquiries your credit score it goes down a little bit and that inquiry stays in your record for some time.
Take a look at the picture below and you can see that I have an inquiry on my account from Jan 27, 2017, when I was contracting the Internet service.
On Aug 05, 2018 (the day I'm writing this post) the inquiry is still there.
So, the idea is to have as fewer inquiries as possible.
Pay your bills on time
As I said before, every financial activity is tracked, so it's better to pay all your bills on time to keep a good credit score.
The pictures below show the example of my credit card and leased car payment. As you can see every month is green (bills paid on time).
How long it takes to have a good credit score ?
I know you must be thinking that it is complex and that it is only after many years of living in the United States that you can achieve that score.
The time to get a good credit score is not that long, it all depends on how you will act with your financial activities. You can have a good one in 1 year.
Once you enter the country and become an active part of the credit system in the United States you must behave well to achieve your goal.
Why Credit Karma is Free?
Yeah, I asked the same question when I first started using it.
Then I realized that when I log into my account there's always some kind of recommendation to improve my score.
Usually, I get some offers for applying for a new credit card or refinancing my mortgage. Those are some ways Credit Karma makes money.
I've never paid a dime neither accepted any offer yet.
It's important to have good credit here in the U.S.
As I said before, it's not that hard to have a good one. Just to recap:
To have a good credit score you must:
- Control your credit card limit.
- Pay your bills on time.
- Avoid too many hard inquiries.
- Let your account age.
- Keep the eye on your own credit score.
- Pay attention to the recommendations to improve it.