Updated: Nov 25, 2022
In the US, everything revolves around the so-called credit score and credit history.
The credit score, a number between 300 and 850 points, is used by financial institutions as a measure of a person's creditworthiness. Every person in the American system builds up their personal score over the years and can track and determine it themselves. The goal is to get a high score in order to get better offers from lenders.
The Credit history is an overview of personal financial data such as accounts, credit cards, debts and repayments. Depending on the total debt, the payment history, the credit utilization and the duration of the credit, the details of the credit history determine the credit score.
In summary, this means that the report indicates how responsibly you have handled your finances over time.
Potential lenders, such as banks, credit card companies or car dealers, use the credit score and credit history to gain insight into a customer's behavior and to better evaluate a loan request. The more a customer can promise timely repayment, the higher the chance of a good loan. And that promise comes through credit history and credit score.
The three most widely used and well-known credit reporting bureaus are Equifax, Experian, and TransUnion, which maintain consumer information. These credit bureaus obtain information from other financial service providers that report consumer behavior. A potential lender gets the information needed from the credit bureaus to grant a loan and on what terms.
The consumer makes a purchase, finances, or contracts with a business.
This company reports this to the credit bureau.
The credit bureau enters this information into their database.
The next time the consumer requests credit or financing, the lender can consult the credit bureau's database file and make their decision.
If a consumer has made little or no purchases, their record with the credit bureau is very thin. As a result, a new lender may not see enough information about the consumer and may decline a loan.
That’s why it is important to make purchases and financing from the start so that you fill your file with information.
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Vocabulary to understand the US Credit Score System
There are some expressions that non-Americans may not have heard. Here you will find the most used and helpful vocabulary.
APR Annual Percentage Rate: The charge on the credit card balance that rolls over from month to month.
Amortization: The gradual reduction of the loan amount through regular payments.
Collection: One of the worst points on a credit report. When payments are overdue and a creditor wants to collect the money owed, the account goes into collection.
Credit Bureau: An agency that provides information about the creditworthiness of individuals or companies. Also referred to as consumer reporting point.
Credit Score: A score compiled from an individual's financial report.
Credit History: A report of a person's financial condition and behavior.
Credit Types: Different types of credit (e.g., Auto, Home, Personal, Credit Card, etc.).
Creditor: When you take out a loan, you pay it back to the creditor.
Debt-to-credit ratio: Also known as utilization, this is the total amount of a consumer's debt compared to their total credit limit. So, the “Credit Utilization Ratio” is the percentage usage of the total approved credit amount.
Debtor: This is a consumer who has a loan and owes money to a creditor.
Delinquent/Late Payments: If the minimum amount of a loan is not paid on time, it is flagged as delinquent.
Derogatory marks: Notes for late or missing payments, collections and other negative remarks that result in a point deduction.
Installment debt: Will be repaid over time with a certain number of payments. The term can be from a few months to 30 years (examples: mortgage loans, car loans, student loans).
Over-the-limit fee: This fee applies when the credit limit (e.g., a credit card) is exceeded.
Payment history: When you made which repayments.
Third-party collections: These are typically companies that work with creditors to collect debts.
Utilization: see Debt-to-credit ratio.
Important Questions about the Credit Score
Where do the credit bureaus get my information from?
Every time someone applies for a loan or makes a repayment, the lender reports that information to the credit bureaus. The sum of this information is then converted into the score and communicated back to the lenders.
How is the score calculated?
The total number of points results from 5 different areas, which are calculated with different focal points. Payment history (35%), total debt (30%), credit history length (15%), credit types (10%) and new credit requests (10%). Also
What score should I have?
The Credit Score falls into several sections from Poor (300-579:) to Excellent (800-850). The higher the score, the better the loan offers. A score around 700 already allows for good loan offers and interest rates.
How do I get the best score?
The more responsible the financial behavior, the more the score increases. There are many ways to increase and further expand your score.
First, as strange as it may seem, you have to take on debt (take out financing for purchases such as household appliances or a car). Then it's about proving to lenders that you're regularly paying off your debts and that you're financially responsible. So, periodically pay off existing debts, reduce overall debt, keep utilization reduced, and don't apply for too many new loans.
What is determined by the score?
The credit score determines whether you will be approved for a loan or contract and what interest rates and terms (e.g., down payments) you will be offered, for example for a home loan.
Where can I find my score and history?
There are several ways to check your score and history. Apps like Mint and CreditKarma give an insight and many bank and credit card apps now offer to check the score.
What tips are there?
There are algorithms and entire companies that specialize only in credit scores, helping consumers build their score and make the right decisions. This here is no legal advice, but a few tips that can often help the score.
If your score is not good enough to get a loan or service, it helps to have a second person sign the contract. As a result, the good score of the second person is taken into account, you get the credit and thus continue to build up your own score.
#2: Register in Contracts.
The credit bureau file can also contain apparently less important contracts, such as for cellphones or utility services.
#3: Beginner Cards.
There are special low limit credit cards for consumers with low credit scores and starting credit histories.
#4: Authorized User.
If someone in your family has a well-established credit card, registering as an authorized user can help.
Tip #5: International Providers.
Some companies, like American Express, have an international presence. If you already use a credit card in your home country, this may appear in the American database.
Whether the credit scoring system works or is fair is sometimes disputed, but it still governs the entire country and the life of every person in America.
Since this is a legal matter, it can be reassuring to ask an expert for help.
If you want to know more or need more details, I'm happy to help!