If the bank suddenly rejected your loan application or the new employer changed his mind about hiring, perhaps the reason lies in your credit history. It is worth checking your credit history, even if you are 100% sure that everything is fine with it. We explain in detail what a credit history is, what it can tell about you and what to do if someone else’s debts are attributed to you.
What is a credit score?
Your Personal Credit Score is generated from all of your credit history records. In other words, it demonstrates the applicant’s chances of obtaining a loan or mortgage from a bank. Financial institutions use it to judge the good faith of the borrower.
Today, banks developed a standardized system for assessing the “credit quality” of borrowers. A credit score is a self-assessment tool for obtaining credit products. Having received such an analysis, you not only immediately understand how “high quality” your credit history is, but also what specific conditions for bank loans you can count on.
How is the credit score calculated?
The credit score is based on:
- Fulfillment of obligations to creditors – that is, the timely repayment of loans;
- Diversification of loans. The use of different types of loans, even multiple ones, has a positive effect on the score, while an excessive number of loans of the same type has a negative effect;
- Length of credit history. This indicator reflects the borrower’s experience in lending;
- The time interval since the credit history was updated – the latest records have a stronger effect on the credit score than the old ones.
Do not forget that not only applicants with a low scoring score but also those who have no credit score fall under the suspicion of banks. These are people who have never taken out a loan. That is why it is difficult for young people aged 18-22 to get a loan. The optimal age for starting a credit history is about 28-30 years. It is recommended to start it by opening a credit card for a small amount and return the funds on time to form a portrait of a conscientious client.
Why do you need a credit score?
A credit score does more than make loans easier. It has other benefits as well.
- Tracking personal “financial health”. The credit score helps to self-monitor the number and frequency of taking loans. A low score indicates a high level of debt, which can lead to personal default. For example, if more than half of your salary is spent on paying off a loan, your financial health is at risk;
- Identifying fraudsters. The credit score reflects all activities associated with obtaining loans. Thus, you can identify fraudsters who have taken out a loan for another person;
- Improving financial literacy. Scoring helps you assess financial behavior and develop healthy financial habits. For example, if you notice that your credit score has dropped due to the fact that you took out ten loans in the last year, this would be a reason to reconsider consumption and personal expenses.
Credit score scale
- 630. Minimum score. In fact, this is a lack of credit history;
- 630-690. Satisfactory score. Available credit limit – $300 – $1000, the limit expands in the absence of late payments;
- 690-720. Good score. The credit limit can be expanded up to $2000-3000, the confidence of banks is increased;
- 720-850. Excellent score. Credit limits of about $5,000, interest rates have been reduced, bonuses are available;
- 850. Maximum score. All the possibilities of the US credit system are open.
In addition to the credit score, there are several other important indicators of the borrower’s reliability:
- Age of credit history. As a rule, banks are reluctant to work with those whose credit history is “younger” than 5 years old. The system implies the gradual building of good credit history, therefore a story aged 8 years old and older is considered perfect. It is believed that during this time a person clearly shows his/her responsible or, on the contrary, careless attitude to money;
- Number of credit lines (accounts). The more correctly repaid loans you have (absolutely everything is taken into account, even transactions that did not go through banks – rent, installments, whatever), the better. The ideal number is about 15-20 lines of credit over 5-8 years of history.
How can I improve my credit history?
You can improve your credit score as follows:
- You can start by participating in a credit union or local bank and apply for a secured credit card — one that is supported by funds you already have in your account. A secured credit card is issued against security equal to the amount of the provided credit limit and which is returned back to the owner upon payment of the full balance on the card. The main banks that offer secured credit cards are: Bank of America; Capital One; Citi; Discover; USAA (Visa and Amex); U.S. Bank; Wells Fargo. A number of smaller banks and credit unions also offer secured credit cards. These include Capital Bank, First Progress, and Green Dot. The main banks that do not provide secure cards are American Express, Barclaycard, Chase, PNC, and Synchrony Bank;
- Make payments automatic. Set up automatic payments through your bank so that all your bills, from utilities to loans, are paid on time. Most banks provide a free bill payment service;
- Rely on your spouse. If you are moving in for love and your spouse has good credit, you can become an authorized user on your spouse’s credit card or apply for a joint loan. Your spouse can call and order a credit card in your name;
- Use a credit card. If you have a credit card in your country from an international issuer, you can call the financial institution and get their approval to issue you a US credit card based on your past relationship. For example, if you have a bank account that operates in the United States, then it is worth trying to get your first credit card there;
- Consider an alternative loan. Social lending is an option for immigrants building credit, although it is not available to everyone. The Mission Asset Fund works with non-profit organizations in eleven states. Its purpose is to connect all clients with credit associations and then inform the credit bureau of this, which improves the score of these people.
Credit history is a matter of time. A good credit score can be achieved in 1-2 years. However, you shouldn’t postpone the beginning of your credit history until later – you probably don’t know when it might come in handy… 😉
