Basic Banking and Credit for New Americans (Part 3): Understanding and Building Your Credit in the U.S.
In part three of our Basic Banking and Credit for New Americans, we’ll discuss credit scores and how they affect your access to loans and other types of credit.
What is a Credit Score?
A credit score is a three-digit number ranging from 300 to 850 that rates your creditworthiness, or how likely you will repay loans in a timely manner according to a lender’s assessment. Think of your credit score as a grade for how you manage your money. A good score can help you get approved for loans with lower interest, while a bad score can make it challenging to borrow money. A credit score is based on your credit history, which includes information like the number accounts, total levels of debt, repayment history, and other factors. Follow these tips and you’ll be well on your way to establishing a good credit score.
Building Good Credit: What You Need to Know
Building a solid credit history is like constructing a sturdy building—both require a strong foundation. Here’s how to start building that foundation:
- Check Your Credit Report: Start by getting a copy of your credit report from one of the three major credit reporting companies: Equifax, Experian, or TransUnion. It’s like getting a report card for your finances.
- You can request free annual and weekly credit reports from AnnualCreditReport.com.
- Need a credit report in Spanish? Request a free copy from Equifax.
- Pay On Time: Like homework, pay your bills when they’re due, which is often considered a sign that you’re responsible and trustworthy. If you always pay your cell phone and electric bills on time or are great with rent, you can use those records to help your score.
Ways to Build Credit
- Alternative IDs: Some financial institutions now allow you to use alternative identification documents, like an Individual Taxpayer Identification Number (ITIN), to get a credit card.
- Secured Credit Cards: If you’re new to credit, a secured credit card is a good way to start building a credit history. You put a cash deposit into an account and that cash balance acts as your credit limit. After a few months of successfully managing your account, you qualify for an actual credit card.
- Credit-Building Loans: Some apps offer credit-building loans to help boost your credit score. Credit-builder loans typically range from $300 to $1,000 with repayment terms ranging from six to 24 months. You make monthly payments on the loan, and the lender will report your payments to the major credit bureaus. Once your repayment term is up or you complete the minimum number of payments required to “unlock” some or all of the loan, you’ll receive access to the funds.
- Lending Circles: Rather than going to a bank to take out a loan, some people choose lending circles (also known as rotating savings or credit associations) to borrow money without paying interest and other fees. Lending circles allow a group of trusted people to contribute a fixed amount towards a shared pool. Then, each member of that group takes a turn taking a loan from the funds. When you take part and pay back on time, it can help your score.
Building credit can be a puzzle, but remember, you’ve got a lot of support. Learn more about managing and improving your credit: Checking Your Credit – What You Need to Know.
Be sure to check out the rest of our Basic Banking and Credit for New Americans series. In part one, we explored the importance of opening a bank or credit union account. And, in part two, we learned how to choose the right bank, type of account, and financial services that best fit your unique financial and personal situation. You can also contact one of our CalMoneySmart partners in your area to participate in one of their financial education programs.