As discussed in What to do when you first land in the US, managing credit in the US is important, and impacts many facets of life (housing, work, financing, etc). Once you are past the secured credit card phase of building credit, you will have many more options open to you.
There are 3 major credit agencies in America. You will have a credit score with all 3, the scores won’t necessarily match. This is due to different companies reporting credit to different agencies. Some will report to all 3, some will report to only 1 or 2 of the agencies. The 3 reporting agencies are;
After a while, it is likely your 3 scores will be similar. For major financing, like a mortgage, most banks will pull all 3 credit scores, and use either the median or average score.
Americans are concerned about what their current credit score is. To exploit this concern, there are numerous credit reporting companies which charge money to monitor your credit. This is a total, and complete, waste of money. If you have cash to burn, by all means pay a firm to monitor your credit. However, the same services are available for free.
I personally use Credit Karma to monitor my credit. Once you set up an account, they will provide your credit score and credit reports for free, updated once per week. Credit Karma will provide your Transunion and Equifax credit scores and credit reports. Credit Karma will email you whenever an update or inquiry is made to your credit report.
Credit Sesame is another website that will monitor your credit for free. Credit Sesame will provide your TransUnion credit score for free which they update once per month. Your TransUnion score can be updated at any time, however Credit Sesame will provide the score from the beginning of the current month.
Since credit is linked to your social security number (SSN), someone stealing your social, and applying for credit is always a concern. Getting emailed about new inquiries on your credit report is great to catch any issues as soon as they occur.
The following are categories of items that could impact your credit;
Credit Inquiry – Soft vs Hard
A credit inquiry can be soft or hard. A soft inquiry is a company looking up your credit, but their inquiry won’t appear on your credit report. A hard inquiry is a company looking at your credit report, and leaving a record on your report that they looked up your credit.
If you have too many hard inquiries, this can cause your score to go down. Creditors don’t want to lend to someone who appears to be shopping around for someone, anyone, to give them credit. A soft credit inquiry will not have any impact on your credit score.
Payment History – 35% of credit score
Always pay your bills on time. Payment history which is whether you pay your bills on time, contributes 35% of your credit score.
Credit Utilization – 30% of credit score
You don’t want to max out any credit you have available. Credit Utilization is the percentage of credit you use. ie if you have a $2000 credit card, and have a $800 balance (you have spent $800 on the card), then your credit utilization is 40%. The lower your credit utilization, the better for your credit score, ideally keeping utilization to under 20%.
Length of Credit – 15% of credit score
This is the toughest part of the credit score for new immigrants to America. Length of credit is the average amount of time, any credit you have (Cards, loans, etc) have been open. To help lengthen your average length of credit, it is best to keep old credit cards open forever. Therefore to help build credit long-term, your first credit card should be a fee free card, so that you can keep it open forever, even if you rarely use it. Closing your first credit card, even 10 years later, could hurt your credit score.
New Accounts – 10% of credit score
This is how many accounts you have opened in the past 6 months, and 2 years. It only contributes to 10% of your credit score, so is not a large factor, however new account openings should be limited to ensure the maximum credit score.
Variety of Credit – 10% of credit score
Variety of credit refers to how many different forms of credit you have. For example car loan, mortgage, personal loan, credit card looks better than just having credit cards. This part of the credit score is not worth focusing on. Only use credit that you need, or provides you benefit. If you get a bump from variety of credit is a bonus.
What is a Good Credit Score?
Lenders give their best terms (best interest rates and products) to the best credit score. This is often called Prime Credit Score and typically refers to a score of 740 or higher. Very few lenders differentiate between levels of prime credit; ie a credit score of 800 is not treated better than a credit score of 740.
A good credit score is considered 720 or above. If your score is between 720 and 740, then you will often be offered the product, but not the best interest rate. Most banks will add 0.25% to the mortgage rate of a lender in this range.
When you credit score is below 720, some products are not available to you. Certain investment mortgage products have a minimum score of 720. If your score is above 650, most lenders will still offer you the product, but may have a lower credit limit, higher interest rates, and other limitations.
When your credit score is below 650, it can be challenging to be approved for any credit. At this point, you will need to negotiate with lenders, ie showing a potential landlord your credit report and explaining why your credit score is lower. Very often if the reason is due to medical debt, school debt, or a lack of credit hisrtoy, a lender will give a pass. For getting credit from very large banks, it is difficult with a lower score, as they don’t have decision makers reviewing your application. Typically larger banks will make decisions based upon the score rather than make exceptions.
If your credit score is under 600, then it is important to repair your credit. Look above at the credit factors, and start working on any credit issues. It is very difficult to get approved for credit with a score under 600. Some employers who run credit may also discriminate against you if your score is under 600.
In conclusion, it is very important to maintain good credit in the USA. If you credit score is too low, as long as you have at least a credit card, your score will increase by simply not applying for new credit, and paying your bills on time.