The Credit Score holds the key to many of your American dreams. Read on to find out what the credit score is, how it works, and how you can work on building yours.
When you move to a new country, you arrive with a lot of dreams. You want a nice apartment, a decent car, plenty of new experiences, and a nice life overall. But all of this costs money. And to have access to money and loans, you will have to prove your financial worthiness to the institutions and businesses in the country. A person’s financial worthiness in the US is measured by his/her credit score. What is a credit score? In this post, we’ll cover all the basic aspects of the credit score.
Why is a Credit Score? (And Why Is the Credit Score Important For an Immigrant?)
As an immigrant, you may feel helpless when it comes to the US credit score. After all, you have to start from scratch when you reach there. Even if you had a flawless credit history in India, that means nothing to the American lenders and credit institutions. It’s particularly impactful since, in the US, credit is used in almost every area of daily life, both in personal and business domains. There have been multiple cases of immigrants being denied access to many privileges due to a lack of a good credit score (or no score at all). In order to get access to credit, you need to have a good credit history, but you can get a good credit history only by getting access to some line of credit. It is a typical Catch-22 situation, where one cannot happen without the other.
Here’s what Vaibhav, who is pursuing an MBA in the US, had to say about his own experience:
“I applied to three US big banks for a credit card and got rejected as I was an immigrant, which made me a risky customer. Finally, I had to pay money to get a credit card from a smaller institution. I did this just so that I can start building my credit history.”
So, this gives you a sense of your credit score’s importance. If you would like help with building your credit score, reach out to Zolve and find out about the options available to you.
Before we look into other aspects of the credit score, let’s go over some fundamental definitions.
What is a Credit Score?
The credit score is a statement that measures the credit risk of a consumer. It helps the lenders to assess the user's ability to repay any loan or credit item he/she is taking and accordingly take decisions about the interest rates and any other terms of the credit offer. This score is in your credit report that consists of your bill payment history, current debt, and additional financial info. The FICO Score is the most popular credit score used across the United States.
What is the FICO Score?
FICO is the abbreviation for Fair Issac Corporation, the data analytics company that developed the score metrics. The score is a three-digit number ranging between 300 and 850. The higher the score, the higher are the chances of the borrower repaying the loan or credit taken.
In this post, credit score and FICO Score will be used synonymously. Ninety per cent of the lending decisions in the US use the FICO score as the consumer metric, which shows the widespread acceptance of it across the country.
Who Provides the Credit Score?
Any of three major credit bureaus, also known as Credit Rating Agencies (CRA), can provide you with your credit score. These three bureaus are Experian, TransUnion, and Equifax. The score from each of these bureaus can be different for a person. Lenders are supposed to report a person's history to these credit bureaus. Unless your lender is reporting to all the three bureaus, your credit score will turn out to be slightly different for different bureaus. Each of the three institutions allows you to check your FICO once every year free of cost.
What are the significant components of the FICO Score?
The FICO score essentially reflects your past credit decisions. It requires you to have enough information in your credit report to generate a score, which generally means that you have at least one credit account which you have been using actively for at least six months. It does not say that you cannot start building a credit history before six months; instead, you should start building your credit history from the first day itself so that you can make use of it when you require it in the future.
FICO score consists of five components:
- Payment History (35%): Refers to whether the person has been paying his/her previous credit bills on time or not. In the credit report, it gets reflected in the delay duration for corresponding payments.
- Current debt (30%): Takes into account the amount a person owes as any form of debt. The usage percentage of an available credit line to you is also one of the major considerations. Suppose a person takes $5,000 as credit, which was his limit, and there is a person with $10k of debt with $50k as a limit, then the second person might have a better contribution from current debt to FICO.
- Length of Credit History (15%): Reflects how long one has been using credit. The more extended history you have, the better it is for your credit score. But if your history is short, then you can try to get other sections as high as possible to get an overall good score.
- New Credit (10%): Shows what credits have been taken on in the recent past. A large number of debts acquired recently increases the risk involved and negatively impact your credit score.
- Credit Mix (10%): Shows the different types of debts you have taken, such as credit cards, auto loans, home loans, and any other such credit products, and indicates how diversified your risks are.
How is the Credit Score Used When You Go to a Lender?
Whenever you take on any credit, the lenders have the option to report it to the credit bureaus. So the credit bureaus get the data and place it in your credit report. FICO licenses the predictive analytics model, which converts the data of your credit report into a FICO score, to the bureaus, who then calculate the score using the model and then sell the FICO score along with the credit report to the lenders. Using this data, along with other relevant data like income, assets, etc., the lender finally decides if they want to provide you with a loan or not. Also, if they are ready to give a loan, then the FICO score helps them determine the terms governing the loan.
This makes it very important for you to check with the lender which credit bureaus they will be reporting to. If there is a discrepancy in the credit report you receive, then you should contact the credit bureau to get it corrected.
Are Credit Scores Reported Monthly?
Most creditors report to the credit bureaus on a monthly basis. The credit bureaus in turn add new details once they are reported to them. This means your credit reports are continually evolving and updating. Once your record is updated, the new information will reflect in your credit score the next time it is calculated.
Zolve helps customers in regular reporting to the credit bureaus, including for use cases such as rental payments, utility bills, etc. Open an account with Zolve for help with maintaining an up-to-date credit history.
What is a Good Credit Score?
If you have a good credit score it can save you thousands of dollars throughout your stay in the US. You can get access to great features on credit cards, better interest rates on loans, and lead a better quality of life than you would have initially imagined. Here are the various FICO Score ranges and what they might represent to any lender:
How Can I Start Building My Credit Score as an Immigrant?
You need to look for ways by which you can get access to credit as early as possible and start building your credit history right from the first day.
Zolve solves this problem for immigrants from India by providing access to credit products from the very beginning. You can apply for a bank account and a credit card even before you set foot in the US. When you actually land in the US and reach your place of stay, you may find that the debit and credit card are waiting for your arrival! You can start swiping away and build your credit history in an easy, smooth manner. Find further details here.
Give Yourself Some Credit!
To summarize, the credit score shows a person's creditworthiness to lenders, and gives access to credit products to the borrowers. After reading this post, we hope you are more aware of the importance of your credit score and mechanism behind it. The credit score is a vital part of your life in the US, so learn as much as you can and start working on it as soon as possible!
Follow this space for more posts like this. We hope they will help make your life more comfortable in the US.