In the United States, the basis of prosperity is founded not only on work and savings, but on building a good credit history. All of your business transactions come together in a unified history.
The basis of a good credit score is to prove yourself as a faithful and punctual payer, as well as a responsible debtor who does not get into debt beyond your ability to repay.
Follow these tips to learn how to build good credit in the United States.
What is a credit history?
A credit history is the record kept by financial institutions of the transactions a person makes with his or her credit. Therefore, in a credit history you can find the following data:
- Number of credit cards you have.
- How many loans you have.
- How much debt you have.
- How often you pay your debts.
What you should know: The moment you first acquire a credit card or receive a loan from a financial institution, you begin to have a credit history.
From then on, those financial institutions will start collecting data about your credit cards or loans, which will begin to show up on your credit report.
What is a credit history for?
The reason why credit history is so important in the United States is that this rating has an impact on different aspects of people’s lives.
To begin with, when applying for a loan or mortgage, the financial institution will review your credit history and, depending on your behavior, will define the terms of the financing (interest rate, payment terms, restructuring facilities, etc.).
But a credit score not only affects the terms of future financial applications, it can also benefit (or hinder) your job search.
Some companies conduct credit history checks on their candidates, as this may manifest undesirable behavior (irresponsibility or disorganization, for example).
If an employer checks credit reports when hiring staff, they must follow the laws under the Federal Fair Credit Reporting Act (FCRA), which requires notice and consent prior to requesting the report.
This is how through this analysis they can assess whether applicants meet the requirements for a position.
What you should know: Credit history can impact not only your ability to be eligible for financial applications, but your eligibility to get a job as well.
Factors that inform credit scoring
A credit report is a document that includes historical information about debt payments, bills and other financial information.
Based on your payment habits, financial institutions calculate your credit score, which ranges from 300 to 850 (the higher the better).
Detail of the credit rating scale
- 300 to 580 will hardly qualify for credit;
- 581 to 640 will qualify for credit at very high rates;
- 641 to 700 will qualify for credit at moderate rates;
- From 701 to 750 will get credit at very competitive rates;
- From 751 onwards you will get the lowest rates in the market.
There are several credit scoring models available today, but the vast majority of them are based on FICO scores. These are the factors they consider when calculating a credit score:
1. Payment history (35 %)
This is a measure of how punctually you make your payments. Always pay ON TIME, no exceptions. Mark your calendar or set a reminder on your mobile phone.
Make sure you never miss the deadline, even if it’s just to pay the minimum balance – a late payment could stay on your credit report for up to 7 years!
2. Credit utilization rate (30 %)
Reaching your credit limit is seen as a negative, so if you always max out your financing, you will have a lower score. Preferably, try to keep your balance below 30% of the amount of available credit on your cards.
FICO evaluates this score based on how much you have available and how much credit you have available to you individually per card.
3. Seniority of the loan (15 %)
Having financing in place for some time will help you get a better score. This is why it is not advisable to cancel an unused credit card, as it could hurt your credit score in the short term. T
hat said, if the card is one of the older ones, you should leave it open. The only reason to close an old account that is in good standing is to avoid an annual fee.
4. Diversity of credits (10 %)
Having diversity (departmental, credit cards, mortgage, etc.) is beneficial, although it is not necessary to apply for each type.
5. New appropriations (10 %)
Applying for credit in different places in a short period of time is a sign of increased risk, especially when a person does not have a long-standing or established credit history.
There are exceptions, such as when buying a car or a home. The FICO algorithm anticipates that in these instances you are comparing your options.
Note: The percentages represent the weight that each of these factors has and in total add up to 100 %.
Tips for building a good credit history
In addition to taking the above into account, there are some additional steps you can take to make sure you are doing everything you can to build your credit score reliably and at a good pace. Read below for some best practices:
1. If you don’t qualify for a credit card, apply for a secured card. This type of account allows you to access financing using your savings as collateral while you establish credit.
2. Know the terms and conditions of your contract. It is essential that you know when you have to pay and how much you have to pay in order not to generate interest.
3. Make your payments on time. Again, while it is best to pay your balance in full each month, if you cannot afford to do so, pay the minimum amount set by your financial institution.
4. Don’t go over the limit. It is recommended to use only 30% of your financing, i.e. if you have a card with a cap of up to US$100, use US$30.
5. Ask for a departmental card. They are generally easier to obtain than bank cards, and their consistent and orderly use creates a positive credit history.
6. Open a debit account. If you pay in a certain amount each month and maintain a fixed balance over several months, this will show signs of stability in your income, which will help you get credit later.
Actions to avoid to avoid damaging your credit report
Just as there are steps you can take to help build your credit history, there are also certain actions you can avoid to avoid interfering with or reversing that process.
Consider avoiding the following bad practices:
. Applying for many loans at the same time. Credit bureaus interpret applying for several loans at the same time as a sign of financial instability or insolvency (lack of money).
If you need several loans, make one application and wait some time to apply for the next one.
. Using more credit than you can afford. Many people confuse credit with free money.
Although financing allows for deferred purchases (i.e. paid later), the money that is used must be paid back sooner or later.
When a person abuses credit and uses more than he/she can afford, he/she will default on payments and this will affect his/her credit report.
. Buying things on credit that will lose their value when the debt is paid off. An important point to make the best use of credit is to know how to choose the cases in which it is used.
Buying “on a whim” (fast food, clothes, cinema tickets, etc.), as well as the purchase of perishable items (such as groceries) on credit is not advisable, as the debt will still be outstanding even months later.
. Overdrawing credit accounts. Overdrafts occur when your account has insufficient funds and you try to cover a transaction.
The bank authorizes this payment, but charges a fee for going over your credit limit. Consistently overdrawing a card affects your credit rating, so it is very important to keep an eye on your available balance before attempting to pay.
How to order a copy of your credit report
It is recommended that you periodically review your credit report to make sure there are no errors in your information or that you have not been a victim of identity theft fraud.
Visit www.annualcreditreport.com to check your report once a year for free.
Alternatively, you can order your credit report from one or all three credit bureaus: Equifax, Experian and Transunion.
The data may differ, as the bureaus upload your data individually. That said, there is a cost to make this request to the bureaus, unless you qualify for a free report, such as if you have been a victim of identity theft or if they have recently been denied credit..
What you should know: When reviewing your credit report, make sure there is no confusion in the data the report provides, how payments have been reported, signs of identity theft, or other discrepancy.
Report even the smallest error to the credit creditor, who in turn must report it to the credit bureaus.
Frequently Asked Questions (FAQs)
What happens when you have no credit history?
Not having a credit history is not a good situation for you, because without a support with which you can prove your reliability as a user, banks and financial institutions involved in lending money will have no way of confirming that you will repay the debt you incur.
Which cards generate credit history?
There are cards called “secured deposit cards” that are often used in order to build a good credit record and then access regular credit cards offered by financial institutions.
In this type of card, you will have to make a deposit that will serve as your credit limit, enabling you to spend that amount to be paid back on the terms that you and the bank agree on a monthly basis.
Having a good credit history can open many doors for you.
Start the process of applying for your first credit in the United States today. We suggest that, to improve your chances of getting a credit approval, you carefully review your documentation before submitting it to your bank branch.
Contact us with any questions you may have about credit in the United States and the process of obtaining it. Send us your questions below.