Everything You Need to Know About Credit Scores
Friday | January 31, 2020 | by Akinyi Ochieng
When you think about “success,” one thing you probably think about is financial security. If you have recently moved to the United States, you might pursue success by continuing your education or starting a new career. However, getting a great job and saving money isn’t necessarily enough to guarantee financial security. You might also need a good credit score.
That’s because banks, businesses, and landlords look at your credit score when considering you for loans, mortgages, rental agreements, and even insurance packages. In some cases, employers might even look at your credit score as part of their overall consideration of your eligibility, or as part of your background check.
There are many advantages to having a high credit score in the U.S. But when you arrive from another country, you will not be able to bring your credit history with you. This can be very frustrating for newcomers! You might also find the credit scoring system confusing.
In this post, we’ll explain how credit scores work. Keep reading to learn all about credit scores!
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What Is a Good Credit Score?
We keep mentioning “good credit scores” and “high credit scores.” Before we discuss how to build credit in the United States, it’s important to know what those phrases mean. You should be aware of what is considered a “good score” and find out more about the complete scoring range.
In general, credit scores vary from “0” to “850” (low to high, or bad to good). When you arrive in the country, you will be at the bottom because you have no credit history. A low credit score is a bad credit score.
Within this range, however, there are four levels you can achieve:
- Bad (300-629)
- Fair (630-689)
- Good (690-719)
- Excellent (720-850)
Typically, financial institutions and landlords prefer that candidates have “Good” or “Excellent” credit scores. According to Experian.com, most credit scores fall between 600 and 750.
How Can You Boost Your Credit Score?
Your credit score is determined by a complex algorithm that takes all your finances into account. Credit bureaus do not disclose their exact formulas, but there are plenty of reliable ways to work on your credit score by following standard guidelines.
Generally, you can improve your scores by:
- Having a mix of different types of accounts
- Maintaining low credit card balances
- Establishing a long credit history
You must also make on-time payments to all the places you owe money, consistently, to establish a pattern. That means paying bills on time, paying rent on time, and making minimum repayments to your loans and credit cards on time.
Here are some in-depth examples, based on the notes above:
Different types of accounts: Your score will increase when you have a balanced ratio of credit to debt. Simply being free of debt isn’t enough, however; you must prove your ability to borrow money and then make on-time repayments. Never borrowing money means that you will never have the chance to prove that you can responsibly repay it. Therefore, you will not be able to show lenders how responsible you are with money. Similarly, it helps to demonstrate responsibility with different types of accounts. If you have loans, credit cards, and a history of repaying bills (such as paying the electric bill on time every month), this will please lenders and make you a more well-rounded candidate. Either way, you must have some established credit history when it’s finally time to borrow money or open a line of credit.
Low credit card balances: Imagine that you have $5,000 left on your credit card (with a total credit line of $12,000). In this case, you have $7,000 in debt on your credit card. This is not perfectly balanced, so you might have a mid-level credit score (based on this card alone). But if you make monthly payments—especially if you pay more than the minimum required—you will see the balance shift. (This is how you achieve a “low balance” on your credit card, which is what lenders want to see.) Once you have more credit available to you than the amount of debt you have left to repay, your score will go up. Each of your on-time payments will also help you improve your credit score, because they establish a pattern.
A long credit history: You want to start building credit as early as possible, because your score will improve the longer you work on building credit. A longer history gives lenders more information to work from when considering you as a candidate for a loan. You should be working on officially establishing credit history from the moment you arrive in the U.S.
How Can You Track Your Credit Score?
There are three major credit bureaus: Experian, Equifax, and TransUnion. These companies create credit reports for everyone living and working in the U.S. (You can get a peek at your report using free credit report aggregators online, such as CreditKarma.com.)
Your credit report combines several factors:
- Information that you share directly with the credit bureaus
- The bureau’s independent research
- Information shared with them by third parties (such as utility companies, banks, or even your landlord)
All this information is combined in a central database and tied to your account.
Your credit report is then used to inform your official credit score. There are two main credit-scoring companies in the United States: FICO and VantageScore. These companies look at your credit report and then use a computer model to analyze other financial factors. The result is your credit score.
Banks, credit unions, and other lenders can request access to your official credit score from FICO or VantageScore. They will use your score to quickly determine if you should qualify for a loan or lease.
It is important to note that, in some cases, it can hurt your score if multiple companies request access. That’s because it can look like you are frequently asking to borrow money or trying to get money from several different financial institutions back-to-back. This behavior can indicate a person’s financial instability, turning them into a risk. Before giving a company your permission to officially file a request, find out if it is going to impact your credit score. But remember: This is okay, and perfectly normal, to happen occasionally, even if the answer is “yes!”
As stated above, your credit score will indicate whether you are a Bad, Fair, Good, or Excellent candidate.
It’s best to keep an eye on your score from month to month so that you will be aware of any major changes. This can help protect you from theft and fraud. However, it’s also simply a responsible way to manage your finances and plan for your future. You don’t want to suddenly find out that you have a non-qualifying credit score when you are sitting down with a lender and making a request.
Now that you are fully informed about how credit scoring works in the United States, we hope you will soon be on your way to “Excellent”!
The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of World Education Services (WES).