What is the Credit Score and how to quickly improve it
Here you are Mama! You’ve been meticulous and followed all my tips on what do to before moving abroad with your kids. You successfully settled in the US and opened your bank account, right? Then it’s time to start building up your Credit Score. What is it, you say? I’ll tell you in a second.
First of all, let me tell you that, in my experience, it takes time and patience. So the sooner you start, the better! Especially when you have kids and can’t afford to not have a Credit Score, because it could compromise any kind of project or need you might face in the future.
The first time I asked some friends advice on how to get a small loan, they asked me: “What is you Credit Score?” I wanted to respond with some classy Italian curse, but judging by their faces they weren’t messing with me using big mouthy words. So I just stood there with a question-mark-kinda-face.
I had absolutely no idea what it was so I asked around and did some research to be sure I deeply understood what we were talking about. And I’m very happy to share it with you, using very simple words. Ready?
What is a Credit Score?
Credit Score is nothing more than a “number” that you can grow in time and that defines you as a good or a bad debt “payer”. Let me explain this with an example. If you have a loan of any kind, the more you pay on time, the more your Credit Score goes up. If instead you collect delays or missed payments, your Credit Score will go down one Hell’s Circle at the time (I think Dante was actually referring to this topic when he wrote the Inferno).
It’s important that you consistently take care and nurture your score because it’s the first thing that banks or financial companies will look at when you’ll need a house or car loan, or any other kind of credit. Right now it might not seem a priority, but trust me, you’ll change your mind. I’ve been there. I didn’t care enough at first and, when the moment arrived, I regretted it.
Here in the US it’s easy to see 16 years old teenagers with a credit card and, as an Italian, honestly my first thought was that they must have been some spoiled really rich kids. In reality, with a good dose of shame, I had to reevaluate. Having a credit card is not a prerogative of very rich kids, but something that youngsters use to start building their Credit Score since early age.
But you and I are not 16 anymore, so we need to dive in as soon as possible. The problem with Credit Score is that it’s hard to improve when you don’t have any credit card or loan and it’s even harder to get any of these two if you don’t have a Credit Score (at least not without paying insanely high interests rates that would make you melt on the spot). Basically, it can be a never ending circle. Luckily enough though, there are some simple ways. Let’s see them.
How do you build a Credit Score from zero?
There a several ways and all very effective:
1. Open a bank account.
Having a bank account itself won’t improve your score, but it’ll give you a starting point to show a stable income. After few months you can ask your bank what services they offer to help you improve your Credit Score.
My bank for instance, offers a $500 mini-self-loan payable in 6 months. This means that you deposit $500 upfront, they land the same amount to you at a low interest rate and when, in 6 months, you’re done with your payments, they give you back your $500 deposit. Basically in time you pay the interests with the only goal to accumulate “points”.
To have a better idea in practical terms: you deposit 500 and get 500 immediately, then you pay 500 in monthly payments + interests and, at the end, you get your 500 deposit back. It’s an expense, but this kind of loan guarantees a good Credit Score improvement, but only if you’re consistent and punctual with payments.
2. Get a Secured Credit Card
This is, in my opinion, the best. Compared to traditional credit cards, you don’t need to show any income to be approved, but you have a credit limit, which means that you can use it only for small amounts.
The only thing that they will require is a small upfront deposit that, after a year of using the card, they’ll return to you. Until a couple of years ago it was about 200 dollars, but with the recession, all major credit companies lowered their costs.
For example, I chose a secured credit card with Capital One, but there are a lot of good options such as Discover, for instance. The deposit was only $49 and the credit limit was $200 a month. I started using it on a regular basis ONLY for gas or small restaurant bills and, after a year, my Credit Score was already considered good. I got my deposit back and the credit limit went up to $500 after only six months. After two years, my score is excellent and the limit is $1,500.
Let me clarify that you don’t have to use it only for those two things (gas and restaurants). I intentionally chose to for a simple reason: make sure to NEVER use more than 30% of the credit limit. Which brings me to the next point.
3. Never exceed 30% of your credit limit
Believe it or not, it’s fundamental that you prove that you don’t need a credit card to pay for your things, but that you use it only when strictly necessary or intentionally. The more consistently you use it, the better, but always with judgement. So stay under the 30% of the credit limit and you’ll see immediate improvement. For example, if your credit limit is $200, make sure to not exceed 65 dollars a month.
4. Make regular payments
All the points above mentioned will totally lose their meaning if you’re not consistent with your payments. Here in the US they don’t deduct your loan or credit card payments from your paycheck. It’s your responsibility to remember when the payment is due or to set and automatic payment from your bank or debit card. I went for the second option. For how good your memory could be, you never know what could happen that might make your forget to pay. I suggest you do the same because even one single missed payment will negatively affect your Credit Score.
Or even better, if you remember to pay BEFORE the due date, then do it. It’ll earn you extra points.
5. Differentiate the type of debt
If you can use the secured credit card AND the mini-loan with the bank at the same time, do it. The more on going options you have and the faster your Credit Score will improve. Obviously, always keep in mind that you don’t pay on time they show up at your door with some angry Pit Bull (so to speak.. or maybe not..). So if you’re not sure you can handle both, it’s better to not take risks and wait a little longer.
6. Add your name as an “authorized user”
If you’re married to an american citizen who had way more time than you to grow his score (like me), it could be a good idea to be authorized by your spouse to use his/her credit card.
This doesn’t necessarily mean that you HAVE TO use his/her cards, but that the more his/her score improves, the more it’ll positively affect yours.
!!!!Careful though!!! If you go down, he/she’ll come with you. This kind of option implicates a big fat demonstration of trust, so I recommend to not abuse it. I wouldn’t want to be in your shoes if you mess with the Credit Score that he/she’s had been sweating for all his/her life.
7. Check you Credit Score on a regular basis
This is important to make sure that there are no bad surprises. Even a house bill, if paid late, can affect your profile as a “payer”.
Now pay attention to what I’m going to say because it’s important. There are several ways to check where your “financial pregnancy” is at:
- Request here you Annual Credit Report. You can only have one free check a year.
- Check through the Credit Bureaus such as Transunion, Equifax or Experian. Here you can have one free check a year, or pay a monthly fee to check it consistently.
Clearly, annual checks have their pros, but careful to not abuse of their services. Believe it or not, every time your request a credit check, it’ll lower your Score. Kinda crazy, right? And this brings me to the easiest (and healthiest) way to keep an eye on your Credit Score.
8. Download the Credit Karma app
Not only it gives a regular report of your score, but it also tells you what affected it both negatively or positively, which credit cards or loan are a better fit for your profile, your progress and much more. All for free and, although it’s not updated to the second, it’s pretty accurate.
It will not lower your score and it offers also extra services such as online free tax filing. Because of this brilliant app, other big financial names had to adjust and offer free credit check too. For example Capital One and Discover also integrated this service in their offer (even if in a more limited way since it’s a cost for them).
Ready to build your Credit Score?
If you follow these tips, in about a year you’ll be able to ask for a car loan without insane interests rates, or maybe even more, depending on your income and your credit/debt general situation. This reminds me to remark once more how important it is to start as soon as possible. Remember that it’s the first thing they’ll look at when you apply for a loan. Consider it your financial business card.
I truly hope that you will never need a loan, in fact I wish you that people come to you for money because it’d mean that, financially speaking, you slay us all! 🙂 In case let me know in the comments below ’cause I kinda need to renovate the kitchen… 😉 Don’t judge me, I’m Italian, the kitchen is my reign!
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