Got Credit? If Not, You Better Start Working Towards It.


If you live or have ever lived in the USA you know very well what it means to walk somewhere and be told that you can't buy a cell phone, be declined a credit card or have to pay massive deposits to the utility companies because you have no credit. It's annoying and makes you feel useless.

The US has very strict rules on credit scoring, which means every time you don't pay your bills on time, it gets reported to 3 different bureaus and they have some mysterious system to score you. Another thing that is hard to understand by outsiders is that if you don't use credit cards and always pay things with mostly cash, you can't establish good credit. Yeap, that's right, you gotta have spend money on credit to get good credit! Let me just make a side note, you MUST use the credit card wisely, pay on time, not go over the limit, etc, etc, etc.

I've just finished a book called : "The Credit Road Map", by Patrick Ritchie and according to that book, the first step is to open a checking account (well, in my opinion, the first step is to get a social security card, a very important document), but assuming you have one, then you start writing cheques (checks) to pay all your bills (which are all paid on time, of course, right?) and after a while you can request a secured credit card, which you set the limit by paying the lender an amount, and you spend up to 50% (no more) of the limit and pay off the amount every month. Little by little, you will build your credit up.

How are Credit Scores Calculated?

Who knows? No one. Actually let me explain better. There are 3 credit reporting agencies who will give you credit scores. They are basically the only ones who can calculate scores, so, once you have your social security card, an address and start building credit, these companies will be collecting financial information on you. These agencies are: Equifax, Experian and TransUnion.

But in saying that, nowadays there are companies who will come close, such as, Credit Karma, Mint, Credit Sesame. These are legitimate companies, but there are lots and lots of scammers out there, so please be very aware.

Excellent - Not many people get here, but it should be your goal. The thing is, once you have an excellent credit score, you get all the lower interest rates, you are not considered a risk because you really care about your credit and don't use it careless.

Good - Someone who isn't carrying a lot of debt, pays bills on time and has accounts opened for over 5 years usually have a good score. Believe me, a good score, is a good score, it counts a lot. You can aim to be excellent or closer to it, that helps.

Fair - Not so good. You still get approved for loans and credit cards, but you will get the higher rates. Once you get approved for a loan, work hard to get your score to a good as soon as, so you can refinance and get better rates.

Poor - The name says it all. If you have no credit or have had a foreclosure or bankruptcy, this is where you will be at. Keep your eye on the target, you really need to get out of the poor score onto bigger and better things.

Your credit score might vary slightly depending on the agency and they all charge to give you the score, but as per the US government everyone is entitled to 1 report from each of these 3 agencies per calendar year (once every 12 months to be exact). To request your report it is safer to go to the Federal Trade Commission page, which belongs to the US government. Please be aware that there are lots of scams online trying to get your social security number, so always use a trustworthy site. And note that you will not get your score from the free report. You get it by using one of the 3 agencies mentioned above and paying for it.

Why is a Good Credit Report Important?

Having a good credit report is important for everything, even getting a job. Many companies in the US will (with your permission) check your credit report (not necessarily your score) in order to offer you a job. Now, if you've just moved to the US, they should understand that you don't have credit history, but you do need to explain that to the prospective employer. It also goes for people who only pay everything with cash (great for them as they have more control over their finances), but not so great when they try to rent a house or buy a car. It's advisable that you check your credit reports every 6 months, just in case there are any mistakes that you need to dispute. It's better to be proactive than reactive when it comes to fixing credit report mistakes.

The US is a credit based economy. It's encouraged and it shows when all of a sudden you are having your credit report checked. It is very important for companies to see that you pay your bills on time, and that you don't have any outstanding debt.

For more tips on establishing credit, there are many websites and online forums that can clarify it better, such as, this one and this other one here.

Disclosure: I am not an accountant, I am not a lender, I'm simply sharing information that I believe to be useful if you live in the USA.