Credit history in the US is completely different from credit history in other countries. A credit history in the US is a confirmed set of all credit financial transactions, which is perceived by government agencies as a full-fledged rating of a person’s reliability.
What is credit history?
To make it clear why having a credit history and using not only debit accounts, we list the areas where a good credit history makes life much easier.
- The cost of renting housing. With a good credit history, you need to pay only the minimum deposit amounts on top of the monthly rent, or not pay them at all. With poor credit history, you may either be denied a rental or be charged a commission equal to one more month’s rent.
- Conditions of contracts. Insurance, cellular communication and any others. The better the credit history, the lower the cost of services and the more favorable the conditions. This also works with utilities – not every company will work with a homeowner who has bad credit.
- Interest rate on loans. The higher the credit history score, the lower the interest on any loan (mortgage, car loan, consumer loans, etc.).
And this is still an incomplete list. If you can’t go anywhere without a credit history, then we’ll figure out how it is built.
How to open a credit account
To open a credit account, you will need:
- Social Security or Individual Taxpayer Identification Number (ITIN);
- valid U.S. address;
- proof of income.
When opening the first credit account, the bank does not provide its own money for circulation. First, you will have to play on credit with your own money. To do this, a Secured Credit Card is issued – a credit account where you deposit your own money and spend it like credit. This is called a security deposit and amounts to $300 or more. This is the minimum, you can add more.
For a certain period (usually from 3 months to 1 year), the bank monitors all your card transactions. If you are a responsible borrower, your security deposit is returned by the bank to a credit or debit account, and the credit limit and credit scores increase.
Below we will tell you how to make sure that a good credit history develops in a year or two, and the confidence of banks grows quickly and efficiently. But first, let’s look at the credit score.
Credit scores explained
Credit scores are calculated by special agencies, based on your credit limits, repayment order, and delays in payments. You can check your credit score on special sites (for example, www.creditkarma.com), but they only give an approximate result.
Even when you just arrived in the United States, your score is not zero. The minimum score is 630 points.
Credit score ranges:
- 630 Minimum. In fact, this means you have no credit history.
- 630-690 Satisfactory. Available credit limit is $300 to $1000, it expands if you pay on time.
- 690-720 Good. The credit limit can be extended up to $2000-3000, and the confidence of the banks has been increased.
- 720-850 Excellent. Available credit limits is about $5,000 per account, interest rates are reduced, and bonuses are available.
- 850 Maximum. All possibilities of the US credit system are open.
In addition to the credit score, there are several other important indicators of reliability:
- Age of credit history. As a rule, banks are reluctant to work with those whose credit history is less than 5 years old. The system implies the gradual building of a good history, so a 8-year history is considered ideal. It is believed that during this time a person accurately shows his/her responsible or vice versa, 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 variant is about 15-20 lines of credit over 5-8 years of credit history.
To make the credit score grow much faster, there are several tricks with a credit card.
Credit card tricks: how to increase credit score quickly
It is quite possible to boost your credit quickly – in 1.5 – 2 years. The faster this happens, the more advantages the financial system opens up for you. But for this to happen, you need to follow a few rules.
- Monthly spending on a credit card should not exceed 20-30% of the credit limit amount. In this case, the bank believes that you are not in extreme need of money and have a stable income – the score grows as quickly as possible.
- No minimum payments – the amount of the account (statement) at the end of the month must be paid in full. In this case, you avoid two problems at once: interest on the loan and occasional late payments.
- By the way, about late payments – they should not be allowed. Even one small delay in payment can seriously reduce your credit score and oblige you to pay large interest. Moreover, after 2-3 years of using credit accounts without delinquency, a huge number of bonuses become available – miles, discounts, special conditions, and minimum interest rates.
- Open a new credit account every year and a half This has a positive effect on the credit history and is beneficial from a household point of view: even if you spend only 30% of the card limit, you get quite tangible money in total, which can be returned without interest.
Of course, if used carelessly, any loan threatens to turn into bondage. But if the credit system is used wisely and without fanaticism, great opportunities can be discovered.
10 more tips from a borrower with a perfect credit score
1. Ask for a deferment
The weight of the payment history in the formation of the borrower’s credit score is 35%. If you miss payments, the score goes down.
Solution: ask the bank to forgive the delay in payment. It’s cheaper for the bank to forgive a regular client and offer a payment deferment than to lose one and spend money on acquiring a new one.
2. Set up automatic payments
In order not to forget about financial obligations, set up automatic transfers to your accounts from your bank account or a credit card. This is convenient when you repay the loan in equal amounts.
You are less likely to be late with payments when you pay bills through online banking. It is convenient and you are sure that the bank will process the transaction on time.
3. Apply for a payday loan online
Have a poor credit score? You can improve it to prove that you are a disciplined borrower. One of the most popular methods is to take out a payday loan for a short period (up to 30 days) and repay it on time. Payday loans are issued by microfinance institutions. These loans usually come with higher interest rates but you will be able to get the money instantly – in a matter of minutes or hours. Loans amounts typically range from $100 and $1,000, and the borrowed funds can be used on literally anything.
Today you can even apply for a payday loan online and get approved immediately. The system will analyze your inquiry automatically and select the lender that seems to suit you most. Borrower reliability requirements are relaxed so almost every person is eligible for such a loan. The main thing is to be sure you will be able to pay back the debt on time. This is considered an easy way to improve your credit score.
4. Don’t check your credit score too often
Another misconception is that you need to constantly monitor your credit score. In fact, the borrower’s credit history is like a road map. The bank analyzes a lot of data when making a lending decision. The score changes gradually, and the weight of the credit history in its formation is 15%.
It may take 15 years to score 850 points. You might get faster, but tracking your score every month will drive you crazy. Check it 2-4 times a year to monitor progress.
5. Don’t be afraid to increase your credit limit
Most consumers do not allow banks to increase the credit limit. If you are a spender, then it’s understandable. Otherwise, increase credit limits.
The idea is simple: the higher the limit, the less likely you are to use more than 30% of your total credit – the line after which the score goes down.
Yes, increasing the limit will result in the loss of several points. But in the long run, you will reduce your leverage rate, which will have a positive impact on your credit score.
6. Ask the bank to reduce the interest
The idea seems crazy, but asking for a lower interest rate works more often than not.
Look at the situation from the position of banks. They spend a lot of money on attracting new customers, so it is more profitable to give in to a borrower with an excellent credit score. Even if they refuse to reduce the interest, this is not the worst thing that happens in life, right?
7. Keep old accounts open and use them from time to time
Many people like to close accounts, thinking they’ll show the bank good debt management.
Alas, it is not. The lifetime of a credit account is about 15% of the credit score. If you leave reliable accounts open for a long time, you will raise your score. We advise you to use reliable accounts once or twice a year, even if they are not needed.
8. Open accounts only when necessary
Sometimes banks offer their clients 50-60 credit cards a year. Do not hurry up opening a new account. Opening a new credit account is reasonable when it comes to buying a house, a car, or when it’s a big deal that could strain your checking or savings account.
9. Focus on revolving lines of credit
When forming the credit score, the following types of debts are taken into account:
- renewable – when money is again available after redemption. These loans usually have a higher interest rate.
- partial – when the loan closes after the final payment.
Pay off revolving loans first, so you pay less interest.
10. Check your credit history annually
Lenders (banks, car dealerships, shops, etc.) may use different scoring models. Because of this, your credit score may differ. Which one is the most correct? All are correct. Each lender uses the model that suits them best. For example, car dealerships use those models that are based on the frequency of payments because it is important for them that their customer pays for their car.
And banks issuing mortgages should study not only the frequency of payments but also other factors: the “age” of the credit history, the percentage of funds spent from the available limit, etc.
The only sure way is to study the credit score from each bureau. Download the “Credit Karma” application, which shows the credit score from “Equifax” and “TransUnion” using the Vantage Score, as well as the “Experian” application with the same score and Fico Score.
What should you NOT do when trying to improve your credit score?
In recent years, a new type of financial fraud has been on the rise in the US. The scammers began to “process” gullible citizens, doing everything possible to lure them to fake websites that offer to improve credit history quickly. Of course, for a certain reward. Scammers use different schemes to get clients. For example, they call, send SMS messages or resort to email newsletters.
Only scammers can offer to boost your credit for money. Such attempts should be stopped immediately, no matter what arguments may sound.
It is also worth emphasizing that it is impossible to delete data from the credit report. Corrections are made to the report only when unreliable entries are found, and there is a special contestation procedure for this. There is no other way to remove information about the discipline of the borrower.