Episode # 52:

How to Build Credit & What's a Credit Score - Tips for Immigrants!

Experiential Podcast Series - Part 4

When immigrating to the USA, most of the time, as you surf the Financial and Economic market, you will come across the term "Credit Score" and what is your "Credit Worthiness." And as you become familiar with it, here are some tips of advice and understanding what it means.

A credit score is just a three-digit number, but it can have a significant impact on your financial life. Your credit scores (most people have more than one) can affect your ability to qualify for a loan or get a credit card by giving potential lenders a sense of how likely you will repay your debts. Understanding credit score ranges can help you assess whether your credit may need some work. And knowing the factors that affect your credit scores can help you identify how to improve them over time.

Credit scores are calculated using the information in your credit reports. Each of the three main consumer credit bureaus — Equifax, Experian, and TransUnion — produce a credit report with input from lenders, credit card issuers, and other financial institutions.

Your credit reports include information about your credit history and activity. The credit bureaus rely on credit scoring models such as VantageScore and FICO to translate all this information into a number.

While each credit scoring model uses a unique formula, the models generally account for similar credit information. Your scores are based on factors such as your history of paying bills, the amount of available credit you're using, and the types of debt you have (we'll cover these factors in detail later).

Federal law prohibits credit scores from factoring in personal information like your race, gender, religion, marital status, or national origin. That being said, it's not necessarily true that the American financial system is unbiased — or that credit lending and credit scoring systems don't consider factors affected by bias.

So, what's a good credit score? Though it varies across credit scoring models, a score of 670 or higher is generally considered good. For FICO, a good score ranges from 670 to 739. VantageScore deems a score of 661 to 780 to be good.

A credit score that falls in the good to the excellent range can be a game-changer. While financial institutions look at various factors when considering a loan or credit application, higher credit scores generally correlate with a higher likelihood of getting approved.

A good credit score can also unlock the door to lower interest rates and more competitive terms. And if you have excellent credit scores, you have an even better chance of being offered the best rates and terms available.

On the other hand, if you have low or bad credit scores, you may be able to get approved by some lenders, but your rates will likely be much higher than if you had good credit. You may also be required to make a down payment on a loan or get a cosigner.

Credit scores depend on these factors:

1. Payment history

For both the FICO and VantageScore 3.0 scoring models, a history of on-time payments is the most influential factor in determining your credit scores. Your payment history helps a lender or creditor assess how likely you are to pay back a loan.

1. Credit usage or utilization

Your credit utilization is calculated by dividing your total credit card balances by your entire credit card limits. A higher credit utilization rate can signal to a lender that you have too much debt and may not be able to pay back your new loan or credit card balance.

The Consumer Financial Protection Bureau recommends keeping your credit utilization ratio below 30%. This may not always be possible based on your overall credit profile and your short-term goals, but it's a good benchmark to keep in mind.

1. Length of credit history

More extended credit history can increase your credit scores by showing that you have more experience using credit. Your record includes the length of time your credit accounts have been open and when they were last used. If you can, avoid closing older accounts, which can shorten your credit history.

1. Credit mix and types

A healthy mix of accounts, including revolving lines of credit (like credit cards) and installment loans (such as car loans, student loans, personal loans, and mortgages), can help build your scores. Lenders want to see that you're able to handle and pay back different types of credit.

1. Recent credit inquiries

When you apply for credit or a loan, the financial institution will conduct a hard inquiry on your credit that shows up on your credit reports. Credit scoring models consider these recent hard inquiries when calculating your scores. Opening multiple new accounts within a short period could suggest to a lender that you're struggling financially.

In summary, No one credit score holds more weight than the others. Different lenders use different credit scores. Regardless of the score used, making on-time payments, limiting new credit applications, maintaining a mix of credit cards and loans, and minimizing debt can help keep your credit in good shape.

I hope this helps to clarify some doubts,

Best,

Alonso Osorio, M.D.

[email protected]