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Credit history in the USA

Besides the GreenCard, two things are essential for a new life in America: a Social Security Number and a good credit history. However, building your credit score in the USA requires patience and is connected to some pitfalls, especially for immigrants.

The credit history gives information about a person's financial past and reveals his or her payment history and reliability.

When US citizens or immigrants obtain their Social Security Number, they begin to build a credit history in the USA. In America, a person's credit history is the determining criteria for obtaining loans, buying and renting real estate, leasing cars, and sometimes even getting a job.

Before a loan is approved in the United States, the lender usually gathers data about the applicant to assess how creditworthy the person is.

A credit history contains the following information:

  • Personal information (name, date of birth, address, artist and middle names, Social Security Number)
  • Information on creditworthiness based on the credit score
  • Information about current loans and the resulting monthly charge
  • Information about canceled credits
  • Information on late payments
  • Information about loans in default
  • Information on forced collections
  • Financial court judgments (e.g., oath of disclosure)
  • Number of inquiries to the credit bureaus
Dollar banknotes and USA flag

The credit score determines the creditworthiness in the USA.

Who rates creditworthiness in the USA?

In the United States, credit reporting agencies meticulously record every financial "movement" of US citizens or immigrants and determine a person's credit score based on the data collected. There are several such credit reporting agencies, also called credit bureaus, in America. The most important among them are Experian, Equifax, and TransUnion.

Lenders always have the option of obtaining information about an applicant's creditworthiness from the credit bureaus. This makes it possible to see how reliably the person has repaid debts in the past and to estimate how high the risk is that payments will not be made in the future.

A credit score is constantly changing and never stays the same for long. Even minor "mistakes" such as late payment of a credit rate can lead to a sharp drop in the score within a short period. However, it takes some time for a credit score to restore itself.

Furthermore, each credit reporting agency works independently from the others and uses its own calculation formulas. That is why there are often several different evaluations for the same person.

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What is a good credit score?

A credit score usually lies between 300 and 850 points. The more points a person has, the higher their level of creditworthiness.

As the various credit bureaus in the USA calculate credit scores differently, there are no clearly defined thresholds for a "good credit score."

However, the following generally applies:

  • below 620: risky
  • 700 or more: good
  • 750 or more: very good
  • 800 or more: exceptionally good

To get a loan, you do not have to approach the maximum score. However, banks associate a low number with too high risk and, of course, make customers pay for it. Typically, a low credit score will result in higher interest rates being charged for a loan.

Advantages of a good credit score

In the United States, a good credit score is required for even the most common things. For example, evidence of a good payment record may be asked in order to register the telephone, cable TV, cell phone, electricity, gas, or water.

When financing cars or other major purchases, you will often see the notice "qualified customers only." This means that installment payments at favorable conditions are only possible with a sufficiently good credit score. A loan for the purchase of a property may be denied because a few points are missing from the desired credit score.

Tip: Check your credit score regularly to make sure there is no missing or incorrect information. The three leading credit bureaus entitle you to a free copy of your credit report every 12 months. You can request these online or by phone.

How to improve a credit score

Positive behavior patterns bring the personal credit score up, and negative habits push it down. But what exactly makes American credit bureaus give plus or minus points?

Some factors are obvious: paying credit rates on time and in full is a precondition for keeping a credit score in order. However, some of the evaluation criteria of the credit bureaus are rather surprising for non-Americans.

It is by no means beneficial for the credit score in the USA not to have any loans. On the contrary, high loans that are properly paid off bring the credit score up. As a result, Americans sometimes obtain loans that they do not need in order to establish a good credit score.

Since credit reporting agencies like to see you pay off loan installments continuously and reliably over time, prematurely paying off loans can also have a negative impact on credit scores.

Other reasons for a poor credit score may include:

  • Owning too many credit cards
  • Having taken out too many small loans
  • Having a too short credit history
  • Reaching the limit on all or many credit cards
  • Having made too many credit applications or requests for information from banks within a short period
  • Having moved house frequently

Attention: Never provide your Social Security Number carelessly. American banks also communicate requests for information to credit bureaus. If those requests accumulate in a short period of time, it can negatively affect your credit score. Hiring a mortgage broker to obtain information in your place may pay off.

Tips for USA immigrants: building a credit history

Immigrants are at a major disadvantage with regard to their credit history: they start at a credit score of 0 in the United States and have to build up their rating first.

Time is an important factor in building your credit history in the USA. Therefore, immigrants should apply for a Social Security Number immediately upon arrival in America. If all bills are paid regularly, and there are no other negative entries, it takes about two years to achieve a good credit score.

In the beginning, immigrants face the problem that they can hardly buy anything on credit without an existing credit score. However, there are some tricks to speed up the process of building up a credit history in the USA:

  • Installment purchases: You won't be able to purchase real estate or cars directly through installment purchases, but it's certainly possible for smaller items like household appliances. Paying all installments on time will help you to bring your credit score up.
  • Secured Credit Card: A "normal" credit card will not be issued to you by American banks initially. However, you can get a Secured Credit Card for which you deposit $300 to $500 at the beginning.
  • American Express: If you obtain an American Express credit card in your home country, you can have it rewritten in the United States. This way, you already have your first American credit card without much effort, and you can start building credit in the US right away.

Are you ready for a life in the United States? All that's missing is a Green Card? Sign up for the next Green Card Lottery and take your chance to win one of the 55,000 cards given away each year!

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Sources:

usa.gov, wikipedia.org, nerdwallet.com, equipafx.com