The United States is a credit-based society with a very mature personal credit evaluation system and infrastructure. Therefore, personal credit scores are closely related to everyone’s life in the United States. For those who are landing in the United States for the first time, the term “credit score” may seem unfamiliar. Here, we provide an introduction and analysis of the personal credit system in the United States.
The personal credit system in the United States mainly involves three aspects: First, the collection of personal credit information and assessment agencies, namely personal credit reporting companies; second, the “consumers” of personal credit, which include financial institutions and employers; and third, the producers and supervisors of personal credit information, which are the individuals themselves. The effective interplay of these three powers forms the well-developed personal credit system in the United States.
For new immigrants, having a good credit history is very beneficial because it impacts various aspects of their lives, including loans. Without a strong credit record, one may not only be unable to obtain preferential interest rates but also be unable to secure loans. For example, for a car loan of $25,000 with a term of 36 months, individuals with credit scores between 500 and 589 will need to pay $891 monthly, while those with credit scores between 720 and 850 only need to pay $732. Similarly, for a home loan of $300,000 over 30 years, individuals with credit scores between 620 and 639 will need to repay $1,572 monthly, whereas those with credit scores between 760 and 850 will only need to pay $1,298. Currently, housing loans are scrutinized rigorously, requiring checks of income and credit.
In American society, “credit” is quite specific, usually referring to your credit score. So, what are the significant factors that affect an individual’s credit score? How can one build their credit score based on these factors?
Currently, 90% of lending institutions use the FICO credit scoring system. FICO scores range from 300 to 850. FICO scores are comprised of five parts:
Firstly, payment history (payment history), which accounts for 35%. It reflects whether previous loans were paid back on time;
Secondly, amounts owed (amounts owed), which accounts for 30%. This generally looks at the ratio of your debt to your credit limit;
Thirdly, length of credit history (credit history), which accounts for 15%. The longer the credit history, the higher the credit score;
Fourthly, types of credit used, which account for 10%. This includes your credit cards, small loans, installment payments, financial accounts, and mortgage loans;
Lastly, new credit accounts (new credit accounts), which account for 10%. Research shows that opening multiple credit accounts in a short time carries high risk, particularly for those with short credit histories. If you apply for too many credit cards in a short time, it may negatively impact your FICO credit score.
In the United States, there are three major credit reporting agencies: Equifax, Experian, and TransUnion, responsible for evaluating each individual’s credit. These three agencies perform evaluations separately. In different contexts, the middle score among them may be used as your credit score for assessments.
Living in the United States, individuals with a credit score of zero or low scores not only find it difficult to borrow money, but their daily lives may also be affected. Therefore, starting to build a credit history from scratch is crucial. The first step in establishing credit is obtaining a Social Security Number. After acquiring the Social Security Number, it is essential to link it with your bank account and pay your bills on time (such as utilities, rent, phone bills, etc.). Generally, it is challenging to obtain a credit card upon just receiving your Social Security Number. You might first apply for a secured card, which is quite common, like the secured credit card from Wells Fargo. Such a credit card typically requires a deposit equivalent to the credit limit, for instance, applying for a $1,000 credit card necessitates a $1,000 deposit, and by making monthly payments on time, you can gradually build your credit.
So, what constitutes a good credit score? Similar to leveling up in a game, essentially, below 650, you should not expect to apply for a credit card. At around 675, you can generally apply for standard cards, but the prerequisite is that your credit score history needs to be over 1 year. At a score above 700, you can apply for nearly all credit cards, given that your credit history is also over 1 year. Otherwise, even the highest scores will not be recognized by banks.
