How to improve your credit score

When it comes to credit in the United States, nothing is simple. You need it to make a major purchase but it is difficult for a new immigrant to actually get a loan. It takes time to build up a credit history, but by following a few rules you can start your American life.

Why you need a credit score

Are you rich? Good! Because then, you don’t need to worry about your credit score and you can stop reading this article. Just pay cash for everything (and I mean everything, like cars, houses, boats, computers, etc.)  and life is great. What? You are not rich? You are more like me? You have some income and you are able to pay your bills, but you don’t have the money to pay cash for a new car that you desperately need to keep your job? Well, then the following information comes in handy.

If you want to be able to rent an apartment, get a contract with an Internet or cell phone provider, or want to finance your new house with a mortgage, companies and institutions will check to see if you have proven to be a reliable payer. And lenders want to make sure that they can rely on your financial sense of responsibility. 

If you don’t pay attention to your credit score and your credit history, life can become difficult in the US. But it does not have to be. Simply follow a few financial rules and you will be able to enjoy your American Way of Life.

Definition of credit score

A credit score is a statistical number that gets assigned to every person to determine his or her creditworthiness. There are several credit bureaus in the US that determine this number, which is usually based on an individual’s credit history. Lenders, such as banks and credit card companies, but also other organizations such as mobile phone or insurance companies, landlords, and government agencies, use an individual’s score to evaluate the likelihood that this person will repay debt or pay bills.

This was something I was well aware of when I moved here: I needed to get a good credit score in order to become a fully valuable person in American society. Well, maybe the words “fully valuable” are a little exaggerated, but if you have bad financial reports banks won’t give you access to bank accounts, credit cards, or loans in case you should need one for purchasing a car or a house. It also determines whether I would be able to rent an apartment or get cell phone service.

What is a good credit rating?

A credit score ranges from 300 to 850. The higher the score, the greater the chances for a person to get approved for a mortgage or to be accepted as a tenant. There are distinct categories within most of the scoring systems, like the FICO Score and the VantageScore 3.0, that help lenders and other companies determine if they want to have a business relationship with an individual.

The different credit score companies evaluate the categories a little differently, but to give you an idea how the categories are split up, it is good to take a look at the FICO Score:

  • Exceptional: 800+
  • Very Good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Poor: below 580

Your payment history, your debt situation, what new loan you have taken on lately, and the length of your credit history all play a part in evaluating your score.

Although these numbers are not set in stone (each agency defines its categories slightly differently and lenders might sometimes be willing to take on a bigger risk with lower credit scores by charging a higher interest rate), it is good to know where you are with your finances.

Building a good credit score can be a challenge in the beginning.

 

How do you build a good credit history?

I knew that all money-related institutions categorized me at the financial level of an 18-year-old high school kid – maybe even worse. I was like a newborn baby to them. I had to earn my credit score from scratch. And how do you actually do that in the US? By going into debt. But you can’t go into debt if you have a bad credit score. I thought that this is just a weird system. But there is no room for whining about cultural differences when you live in a foreign country. You just have to accept them and see how you can adjust.

I had to find a way to change my financial report as quickly as possible. Because I knew I was going to need a car if I wanted a job, and I knew I wouldn’t have the money to pay for a good car with cash.

Find out, what simple rules you have to follow, when you just arrived in the States and are facing the financial system.

Get a secured credit card

I went to the Bank of America, which is set up to deal with international money transfers, opened a checking account and applied for a credit card. I was not surprised when the bank wanted to check my husband’s credentials first in order to accept my application for a checking account. But my application for a credit card got rejected right away, because of my horrendous credit score as a newly immigrated resident.

  • The bank offered me a secured credit card instead.
  • I paid $2,000 into a separate account as a safety deposit and was allowed to use my bank card against this deposit.
  • I had to carefully replenish this account in advance in order to be able to pay with my given bank card.
  • There was no credit involved, and therefore the name “credit card” was a bit misleading. But the bank told me this card would help me build a credit score.

After two years I apparently was trusted enough to have a real credit card. The bank exchanged my secured card with a normal one and paid the $2,000 back into my checking account. One step at a time.

Get a second credit card as soon as possible

At the bank I got the advice to get a second credit card in order to build up more debt and therefore a quicker score. But not too soon! When you apply too often for something that causes companies to check your credit - a new cell phone plan, for example, or refinancing a mortgage, a new car loan, or just a new credit card - this lowers your credit score and might even alert your mortgage company or bank. Banks get suspicious if they get the impression that you are piling on new loans.

Pay all your bills on time

But only having a credit card or two doesn’t do it. You also have to pay them off on time. Make sure that you pay at least the minimal amount to your bank account every month. Even that's a bad idea, because it will take you forever to pay it off. You also need to do that with all your other bills, of course. It is important to prove that you are reliable.

Take on debt, but not too much

It is a strange logic, but you need debt in order to prove to future lenders that you are really good at making regular and punctual payments. That will raise your financial standing considerably. As long as you spend less than 36 percent of your monthly income on paying off your debt, you are in good shape. This is called the dept-to-income ratio (DTI). If your DTI is above 50 percent, it is likely no one will give you another credit line because lenders assume that you wouldn’t be able to handle more payments.

Get a second credit card to build a good credit score.

 

How do you build credit fast?

Sorry to tell you this, but there is no way to do it quickly. You need time and patience to build a good financial record. I know, there are many websites that promise that you can fix your score within 30 days, but even the Fair Isaac Corporation, the agency that provides the FICO Score, admits that repairing a bad credit score or building new one requires patience. They compare this process to losing weight: you will need time and discipline in order to reach your goal. They even warn not to follow any quick fix tips because that can hurt your financial trustworthiness more than help improve it.

I followed all the recommendations that I have mentioned above in this article, but even after paying off my secured credit card diligently and punctually and paying regularly for our utility bills, I was not deemed worthy to have my own car loan. My husband had to cosign it. 

How to ruin your credit score

Let's start this topic with a little story of my daily life:

I talked to a former colleague of mine. He is retired and lives with his wife and two dogs on a boat traveling up and down the American coasts, year-round. He told me that he has the worst credit score you can think of because he never took out a loan. He only bought something when he was able to pay for it straight away. His whole life he always paid for his cars, boats, houses, etc. with cash! Apparently, he had the money to do so.

He was always a highly salaried engineer and didn’t have to rely on loans in order to get what he needed.  He never had and still refuses to get a credit card as long as he can pay cash or by debit card. And he seriously doubted that any bank would give him one anyway, since his credit report is terribly low.

Therefore the following things have to be avoided:

  • Not having a credit card at all (except you have enough cash for a lifetime)
  • Missing a card or loan payment
  • Applying for too many credit cards
  • Use your complete credit limit (you need to spend less than that)
  • Bankruptcy

Useful links

You can request a free copy of your credit report from each of the three major credit reporting agencies – Equifax®, Experian®, and TransUnion® – once each year at AnnualCreditReport.com or call toll-free 1-877-322-8228.

Read more about free credit card reports here: https://www.consumer.ftc.gov/articles/0155-free-credit-reports

Visit https://www.usa.gov/credit-reports for more information about credit reports.

For tips about improving your credit score, I would always go to the agencies that actually are responsible for these kinds of scores. The Fair Isaac Company has a great website that might be much more helpful than some blogs: https://www.myfico.com/credit-education/improve-your-credit-score/

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