Hi all,
Last year I immigrated to the US. I recently received a Social Security Number, and I am now trying to understand how best to go about the task of building a good credit score (with the main intention of getting a good mortgage rate in a few years time). Any advice would be much appreciated, but here is what I have found so far:
1 - Having a credit card seems to be a good starting point, but I am not clear on whether it needs to be used to any specific extent in order to contribute to my credit score? In other words, would it be beneficial to use as much as possible of my line of credit each month? Or does having a credit card in itself count for something?
2 - I have come across something called "Credit-builder loans", "Fresh Start Loans" or "Starting Over Loans"... But these seem to be aimed at people who are starting from a bad score rather than from no score at all. Any comments on this would be great.
3 - In my home country having a contract with a cell phone provider, or paying for items in installments contribute to your credit score... Bot sure whether that's the case in the US. Again - any help/insights would be great.
Hello and welcome!
Here is a link to what is used to calculate your FICO score
https://www.myfico.com/credit-education/whats-in-your-credit-score. There are others ways this is done (with slightly different percents, but I'm going to use this one. The overall ideas are the same FICO is your credit score.
So from that chart your FICO credit score is calculated based on:
35% is paying on time
30% amounts owed (credit utilization ratios)
15% length of credit history
10% new credit
10% credit mix
Getting to your questions"
#1 Getting a credit card and using it. This impacts the: paying on time, amounts owed, length of credit history, and credit mix.
How? It gives you an opportunity to show the calculators that you can handle this type of credit responsibly. It gives you more credit you are responsible for (as another poster mentioned, credit utilization ratios). Get as much credit as you can, it makes your ratios better. You start building a credit history, which shows a patter of good and responsible use. It also changes your mix of types of credit you have.
You will notice that no where in the percents i listed does it matter how many times you use the credit card. You need to use it enough to keep it active. Actually there is some benefit to paying it off twice monthly, since the date the data is reported to the credit bureaus is not necessarily aligned with the date your bill is due, so if you pay the credit card off twice a month (or more) your credit utilization will always be as low as possible, maximizing that 30% of good credit.
#2 I don't know these specific loans, but they most likely play off the issue that people with bad credit or no options can't get credit cards or loans worth having. They help your credit score for the same reasons as #1. If a person already has credit cards having a loan does help with credit mix, since a loan is different type of credit, and adds to the mix.
Could these help you, yes, but I would not recommend taking out a loan you do not need, as this is not a fiscally responsible thing to do in the long run. Loans = paying interest. Don't pay interest.
#3 Paying your bills on time counts towards a good credit score, so yes, a cell phone contract or paying for items on contract would count. Always paying all your bills on time is the best way to get your score up. Try to have bills in your name, then pay them.
#4 Yes, being on your wife's card will help you as long as the bill always gets paid.
Credit score is just linking your name to your credit using financial habits to establish the risks associated with loaning you money. Lower risk, the more likely they will loan you money at a good rate.
I didn't talk about the 10% new credit. Be careful about that. When you apply for a new credit card they do a hard pull which hurts your credit for a time. If you get rejected for credit, it increases your chances of getting rejected by others. At the low end, it can be a bad cycle.
A secured credit card is not a bad way to start the process and get building.
Good luck!
Loren