What is a credit score and why is it important?| North Loop Official Blog
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North Loop
13 Jan 2020

What is a credit score and why is it important?

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Overview of Credit Scores

If you’re new to the US you will be confronted with what is arguably the most important number in personal finance: your credit score. Credit scores are asked by banks, landlords, financial institutions and many more to verify your credit worthiness and see how ‘risky’ you are to be their customer. What does it mean to be credit-worthy? It’s the likelihood you’ll pay back your debts - and its extremely important for a bank to be able to determine that likelihood before they give you a loan.
Here, we’ll look at what exactly is a credit score, why is it important and how you can improve your credit score.

History of Credit Scores

The most common US credit score is called a FICO score, and was introduced in 1989. FICO scores are used by the majority of lenders and banks, and comprise of information from the three major credit bureaus: Equifax, TransUnion and Experian. FICO is so commonly used that many people use ‘FICO Scores’ in the same vein as credit scores (similar to using Xerox to mean photocopying).
VantageScore
You may sometimes see VantageScore, which was introduced by Experian, Equifax and TransUnion to compete with FICO. Although less common, it holds a similar style of scoring.
Profile image2: History of Credit Scores
Credit: North Loop

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Why is having a credit score important?

A credit score is used by the banking and financial system to determine your ‘creditworthiness’ i.e. how likely are you to pay back a loan they give you. Every time you apply for a loan, mortgage or credit card, these institutions will run a check on your credit score to determine your eligibility for the product and the rates they will give you. So if you have a really high credit score, that means you are very likely to pay back your loan. Thus, a bank will feel comfortable not only approving a loan to you, but giving you better interest rates as well.
When you apply to rent an apartment, a building landlord may run a credit score check on you as well. This is because they want to make sure that you will pay you rent on time.
If you’re new to the US, you won’t have a credit score or any credit history. This can make life difficult, and we’ll talk about ways to work around it below.

What impacts your credit score?

There are many things that can impact your credit score, from your history to the kind of debt you have. FICO scores range between 300-850 (with 850 being perfect). 37% of people had a score between 750-850 in 2013.
  • 35% of the score is based on your payment history - have you paid your bills on time, serviced your credit card debt etc. If you have declared bankruptcy or had any company take action against you for unpaid dues, this will affect your score.
  • 30% is debt burden - how much debt you have, how much credit you have available to you and so on. There are six metrics used for this, including debt to limit ratio, number of balances and more.
  • 15% length of credit history - this is simply how long you’ve had credit history.
  • 10% is types of credit used - do you have mortgages, installment loans, revolving lines of interest? The more types of credit you have, the better it is.
  • 10% hard credit pulls - whenever a lender or bank does a ‘hard pull’ on your credit score, this can impact it. If you have a lot of ‘hard pulls’ done in a short period of time, this will impact your score negatively. If you’re checking your credit score with a credit checker, that is considered a ‘soft pull’ and won’t impact your credit score (such as the one North Loop provides).

How to build credit score from nothing

If you’re new to the country, it can seem like you’re in a catch-22: you need to have credit to get a loan, but you need a loan to build credit! Luckily, there are multiple ways to improve your credit score:
  • Report Your Rent - most people don’t realize they can use their rent payments to build their scores! Check with your landlord if they report your rent to the credit bureaus, or use a rent reporting tool (these usually charge you) to start reporting your rent and getting a credit score as quickly as 8-10 months.
  • Keep your debt-to-limit ratio low - an incredibly important strategy is to not go over 50% of your credit limit. If you have $5,000 available to you, make sure you’re always at $2,500 - this can dramatically improve your score very quickly. It’s important to note that this is at any given point, not at the end of the month. So if you start going over 50% of your limit, start paying off credit cards immediately.
  • Pay your bills on time - needless to say, the longer you’re not paying 100% of your credit card dues and other bills, the worse it is. Pay off 100% of your credit card every month (not just the minimum) if you want to get that sparkling 800+ score.
  • Get a secured card - the best way to get a credit history and score is to get a secured card. Similar to unsecured credit cards, a secured card requires a deposit that will be your credit limit. Put in a deposit (e.g. $250), and this will be your credit line. Every month, the card company will report your credit to the bureaus, and within 10 months you’ll have a credit score and credit history.

Curious about which secured card card to get? North Loop offers an industry-leading secured card with amazing cashback and travel insurance. Sign up now
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This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended be advice. You must obtain professional advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax, investment or other professional advice from North Loop or its affiliates. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. All opinions expressed do not reflect the views of North Loop nor are endorsed by North Loop.