How Does A Credit Score Work In The USA?
Credit scores are a big part of American financial life but can be unfamiliar to newcomers. We’ll explain how a credit score works in the USA.
While credit is a part of the economy of many countries, perhaps no country is more dependent on credit than the U.S. Your credit score can determine whether or not you can rent an apartment, be hired for certain jobs, and borrow money for a car, a home, to attend college, or to start a business.
We’ll explain everything you need to know about how credit scores work in the USA and how you can work on yours!
The anatomy of a credit score
Your credit score is based on your credit report. Your credit report contains financial information about you including the kinds of accounts you have (credit cards, car, student, and personal loans, a mortgage), the date the account was opened, the balances on the accounts, if you made your payments on time, and if you have defaulted on loans, or have filed bankruptcy.
Credit bureaus collect this information. The three major ones are TransUnion, Equifax, and Experian. They turn this data into a number, generally from 300-850, the higher your score, the better. These are the ranges for credit scores:
300-629: Bad. A credit score in this range can indicate two things. Either the person has not handled the credit they have well (high balances, late payments) or they have a “thin” credit file. Many new immigrants and young people have thin credit files because they don’t have much credit history.
630-689: Good.
690-719: Fair
720-850: Excellent
Understanding your credit score is pretty simple. There are five components to a credit score and each is weighted for importance:
Payment history 35%: Do you make your payments on time. Even one late payment can affect your score, so making all of your payments on time is essential.
Utilization 30%: Of your available credit, how much are you using? Ideally, utilization is under 30%. For example, if you have two credit cards, and each has a $500 limit, you have $1,000 of credit. To keep your utilization at 30% or under, your balances can’t be more than $300 total. Of course, it’s optimal for your finances to never carry a credit card balance, as doing so means you’re paying interest.
Length of credit history 15%: How many years have you had credit, the longer, the better. This is tough for newcomers and the reason it’s crucial to start building credit right away.
New credit 10%: How many times have you recently applied for credit. Trying to open new accounts frequently is a red flag to potential creditors.
Types of credit 10%: How many types of accounts do you have. A mix is better, i.e., credit cards (no matter how many you have, it counts as a single type), personal loans, mortgage, student loans.
Reasons you need a credit score
When you apply for an apartment, a credit card, or a loan, the person (or computer) looking at your application will pull your credit history. The information tells them whether or not you’re a good or poor credit risk. If they rent you an apartment, approve you for a credit card, or loan you money, will you make your payments on time?
A less than ideal credit score doesn’t necessarily mean you’ll be turned down, but you might have to pay more. A landlord may require an additional deposit on top of the customary first and last month’s rent. A credit card or loan may come with a higher interest rate than you’d be offered if your score was higher.
Being offered a lower interest rate will save you a lot of money over time. Even a 1% difference in interest rates can be the difference between thousands of dollars, tens of thousands in the case of a mortgage. To be eligible for the best interest rates, you don’t need a perfect 850 credit score. Generally, a score of 760 or higher is good enough.
How to build credit
The good news is that it’s not difficult to start a credit history in the USA! More good news for newcomers and young people. Having a bad credit score because your credit file is thin is better than having a bad score because you’ve not handled credit properly. A bad credit score can be repaired, but it takes longer than building credit. If you’re a new immigrant with no credit history, you can start building one today.
One of the best ways to build credit for non-U.S. citizens is to open a credit card. While some conventional credit cards may be hard for non-citizens to qualify for, plenty of others understand the unique circumstances of newcomers without a credit history.
Petal does not require a Social Security number, just an ITIN. It looks at factors other than your credit score, including income and debt-to-income ratio when deciding whether or not to approve an application. Petal also reports your activity to all three major credit bureaus, something essential when you’re trying to build credit.
Building credit without a credit card
Some people will struggle to be approved for a credit card, even a secured credit card. And some people are fearful of credit cards. Credit cards are a tool, and like any tool, they can be used well or used poorly. There is no magic secret to avoiding credit card debt, which is absolutely something to avoid. Simply don’t buy things you can’t afford, don’t need, and don’t have the cash to pay for and pay your balances in full every month.
But some people may feel as though credit cards would be too much temptation and lead to trouble. If that’s the case, by all means, don’t apply. There are other ways to build credit, and credit card debt will wreck your credit faster than having a credit card will build it!
If you can’t or would rather not open a credit card, you can build credit without a credit card.
SeedFi offers credit builder loans. It’s similar to a savings account. You make monthly payments, and the money is returned to you at the end of the loan term. Your payments are reported to the credit bureaus.
Taking out a personal loan from a bank or credit union will help build your credit. This is one reason it’s important to open a bank account as quickly as you can. Having a relationship with a bank or credit union can help boost your chances of loan approval. The bank can see the amount of money in your accounts, how much goes out, and where it goes. If you keep a relatively high balance compared to your expenses, the bank may be more willing to extend a loan to you even if you don’t have much credit history.
Sable offers a secured credit card. You put down a deposit, and the deposit amount is your credit limit. You make monthly payments, and those payments are reported to the credit bureaus. Unlike a standard credit card, you can’t go into debt using a secured card. If you fail to make payments, your deposit will be used to pay the balance. A secured credit card can be a good credit-building alternative for those wary of the dangers of conventional credit cards.
If you have someone in your life who has an established credit history, they may be willing to make you an authorized user on one of their credit cards. You would have your own card with your name on it. You pay off the charges you make each month, and as long as the card issuer reports your payments separately from the account holder (some cards don’t, so be sure to check), it helps build your credit. If you fail to make your payments, the account holder is responsible so there is no risk to the credit card issuer.
Credit bureau Experian offers a service called Experian Boost. It allows you to connect your monthly bill payments to your credit report, and the service is free!
Build your credit and more
Upwardli was created with the needs of new immigrants to America in mind. We can help you find the tools you need to build your credit, navigate a new financial landscape, and much more.
