What is the Credit Score and how to have one for the first time?

Understanding and Building Your Credit Score in the USA: guide for immigrants.  

Countries around the world have different ways to assess creditworthiness and grant credit to their citizens. Countries like Canada and the UK have a credit record similar to that in the USA, but most countries don’t have a system based on grades and unique reports. And even if they do, that is worthless when migrating because you can’t transfer those scores to the US and vice versa. For those reasons, one of the first things that every immigrant should focus on when they arrive in the USA is to build a credit score from scratch. Today we will explain to you what is a credit score, how to get your first report, and how to improve it.

What is a Credit Score?

A credit score in the USA is a numerical representation of your creditworthiness, which lenders use to evaluate the risk of lending you money. Scores range from 300 to 850, with higher scores indicating better creditworthiness. Similar to your grades at school, they are a reward for good behavior; the higher your score, the better.

For newcomers to the USA, establishing a credit score is essential, as it affects many aspects of life, including the ability to rent an apartment, secure a loan, or even get a job. Here's a step-by-step guide to starting and improving your credit score in the USA:

How to get your first report:

Most of us went to the bank to apply for a credit card or other type of loan and were rejected because we don’t have a credit score. When we ask how to get a credit score, the response is with a loan. This sounds like the eternal dilemma of what comes first, the egg or the hen. Well, don’t panic, there are different ways to get around and make the credit bureau receive a first report with our name on it.

1. Apply for a Secured Credit Card: A secured credit card is a great way to start building credit. You'll make a security deposit, which typically becomes your credit limit. By using the card and paying off the balance on time, you'll begin to establish a credit history.

2. Consider a Credit-Builder Loan: These loans are designed specifically for building credit. The money you borrow is held by the lender, and you make payments until the loan amount is reached. These payments are reported to credit bureaus, building your credit history.

3. Become an Authorized User: If someone with a good credit history is willing, becoming an authorized user on their credit card can help you piggyback off their credit history, giving your score a boost.

How to improve my credit score?

In order to enhance the credit score, it is essential to grasp the calculation process behind it. The credit score is determined by five key factors: 1) payment history, 2) level of debt, 3) credit history duration, 4) credit variety, and 5) number of credit inquiries.

1. Pay Bills on Time: Consistently paying your bills on time is one of the most significant factors in your credit score. This includes rent, utilities, and credit card payments. If you have paid bills late, have had an account referred to a collection agency, or have ever declared bankruptcy, this history will show up in your credit report.

2. Keep Balances Low: High balances can negatively impact your credit score. Many scoring models compare the amount of debt you have and your credit limits. If the amount you owe is close to your credit limit, it is likely to have a negative effect on your score. Try to keep your credit card balances low relative to your credit limits.

3. Avoid Unnecessary Credit Inquiries: Each time you apply for credit, it can result in a hard inquiry, which may lower your score. Apply for new credit accounts only when necessary. If you need to be shopping around, request a copy of your own credit report, or creditors are monitoring your account or looking at credit reports to make prescreened credit offers, these inquiries about your credit history are not counted as applications for credit.

4. Diversify your credit. Many credit-scoring models consider the number and type of credit accounts you have. A mix of installment loans and credit cards may improve your score. However, too many finance company accounts or credit cards might hurt your score, so don’t abuse them.

5. The longer your credit history, the better. A short credit history may have a negative effect on your score. For a newcomer, there is not much we can do to have an old credit history, but if in the future you don’t want to use a particular credit card (no annual fees), we recommend you pay it in full and not use it anymore instead of closing it; in that way, the account will still be getting older.

6. Monitor Your Credit: Our last recommendation will be to keep an eye on your credit report for errors or fraudulent activity. Under federal law, you're entitled to a free credit report from each of the three major credit bureaus once a year. Go to www.annualcreditreport.com. This is the only authorized online source for a free credit report. You can also call 877-322-8228 or complete the Annual Credit Report Request Form and mail it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

The advantages of having a good credit score in the USA are numerous. It can lead to lower interest rates on loans and credit cards, higher chances of loan approval, better insurance rates, and even more favorable terms when renting an apartment or setting up utilities. Building a good credit score takes time and discipline, but the benefits are well worth the effort. By following these steps, you can establish a solid financial foundation in the USA and enjoy the opportunities that come with good credit. Remember, the key is to start small, be consistent, and always pay on time. Good luck on your credit-building journey!