The personal credit system in the United States mainly involves three aspects:
1. The collection and evaluation agencies of personal credit data, namely personal credit investigation companies;
2. The "consumers" of personal credit, such as financial institutions and employers;
3. The producers and supervisors of personal credit data, namely individuals.
The effective operation of these three aspects has formed the developed personal credit system in the United States.
For new immigrants, having a good credit record is very beneficial as it affects various aspects of life and loans. Without good credit, not only is it impossible to obtain favorable interest rates, but loans may also be unattainable.
For example, for a car loan of $25,000 with a term of 36 months, a person with a credit score between 500-589 would pay $891 per month, while a person with a credit score between 720-850 would only pay $732. Similarly, for a mortgage loan of $300,000 with a term of 30 years, a person with a credit score between 620-639 would pay $1,572 per month, while a person with a credit score between 760-850 would only pay $1,298. Currently, mortgage loans are scrutinized very strictly, and income and credit are mandatory checks.
In American society, "credit" is very specific, usually referring to your credit score. So, what important factors affect an individual's credit score? How can one accumulate credit scores based on these factors?
Currently, 90% of lending institutions use the FICO credit scoring system, which generally ranges from 300 to 850. The FICO score is composed of five parts:
1. Payment history, accounting for 35%. It reflects whether previous borrowed amounts have been repaid on time;
2. Amounts owed, accounting for 30%. Generally, it looks at the ratio of the amount owed to the credit limit;
3. Length of credit history, accounting for 15%. The longer the credit history, the higher the credit score;
4. Types of credit used, accounting for 10%. This includes your credit cards, small loans, installment payments, financial accounts, and mortgage loans;
5. New credit accounts, accounting for 10%. Research shows that opening multiple credit accounts in a short period poses a high risk, especially when the credit history is very short. If too many credit cards are applied for in a short time, it can negatively impact the FICO credit score.
In the United States, there are three major credit reporting agencies: Equifax, Experian, and TransUnion, which are responsible for evaluating each person's credit. These three credit reporting agencies evaluate separately. In different situations, the middle score may be used as your credit score for evaluation.
Living in the United States, individuals with a credit score of zero or low find it not only difficult to borrow money but also may have their daily lives affected. Therefore, it is very important to start building a credit record from scratch. The first step in establishing credit is to obtain a Social Security Number. After obtaining the SSN, it is essential to link the SSN with your bank account and pay bills on time (such as utilities, rent, phone bills, etc.). Generally, it is challenging to apply for a credit card immediately after obtaining a Social Security Number, so one can first apply for a secured credit card. A common example is the secured credit card from Wells Fargo, which requires a deposit equal to the credit limit. For instance, a $1,000 credit card requires a $1,000 deposit, and by paying the bill on time each month, one can gradually build credit.
So, what credit score is considered good? It is similar to leveling up in a game; generally, if your score is below 650, you should not think about applying for a credit card. A score around 675 usually allows for general card applications, but the prerequisite is that your credit score history must be over one year. With a score above 700, you can generally apply for all cards, but again, your credit history must be over one year. Otherwise, no matter how high the score, banks will not recognize it.