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.
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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.
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.
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