Credit (as in credit scores)

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Hi friends,

What is credit? How do I grow my credit? I’m not even sure what other important questions I should be asking.

My parents are immigrants and I’m also one. I moved to the U.S when I was 11. Unfortunately my parents didn’t have the chances that I had and they didn’t get much of an education. Sometimes I feel like I’ve had to navigate a lot of life in the US by myself (SATs, college applications, school loans, etc.) on top of helping my parents navigate it too. I’m a young adult now and I don’t have any guidance and would really like to start thinking about my future. I think credit is a good place to start. Any info/advice is welcome, I literally barely know much about the system. Thank you.

In: 6

Presuming you are in the country legally and have a social security number, you need to start a banking relationship with a bank. They will report data about you to credit bureaus, that’s the data they use to calculate credit scores. Then you’ll need to get them to loan you some money. The easiest way to do that is a secured credit card. You put money, let’s say $300, into a bank account in exchange for a credit card with a $300 limit. This is better than just using a debit card on your account because it reports as “credit card”. Use the card, and then pay the bill. Every month you do that your credit takes a step from “unknown” towards “good”.

Credit is the willingness of other people to loan you money. A basic type of credit would be a credit card. The credit score is a way of taking note of how well you have paid back previous credit, how much credit you currently have relative to income and some other factors.

So let’s say that you have applied to me for a credit card. I look at your information in the credit bureaus and see that you have always paid your car loan on time, have never declared bankruptcy and have never had a loan go bad or get charged off. I see that your salary is 36,000 per year. So I decide that you can have the credit card with a $1000 limit. If you pay it in a timely manner and pay off the car loan, I would be willing to raise it to $2000 in a few years.

A credit score or a credit rating is a measure of how likely a credit agency thinks you are at paying back any loans (credit). A higher score is better. Anyone who ever loans you money, be it a credit card, car loan or just utility payments will report this back to the credit agencies. When you want a new loan these companies are able to pull your credit score from one of the credit agencies and based on your score they can decide what interest rate they want to give you if they even want to loan you.

There are lots of techniques going around for how to quickly get a good credit score but naturally these tricks get found out and they change the algorithm to give you a worse score. The best advice for a long term good credit score is to just be a responsible adult. Do not shy away from getting loans like credit cards or low interest car loans or mortgages, however keep up on the payments and pay down the loans as soon as you can. If you have a hard time even getting a loan in the first place you can often get parents to cosign so you can use their credit score as well as yours or you can get a secured credit card where you put down a deposit on the card first. You should also look at /r/personalfinance for more information.

Credit is ability to borrow money… credit cards, home mortgage loans, car loans, student loans, etc.

All those credit/loan accounts get reported to credit bureaus and compiles into credit reports, which are centralized repositories for borrower info that banks and other lenders can refer to when choosing to lend to you. They show all the accounts you have and had, whether you paid on time or were late paying (more than 30 days), any negative marks like bankruptcies or accounts charged off.

Credit scores are algorithm that parse various info about your credit history into a number from 300-850 that allows for quicker decision making in most cases. Rather than a loan officer having to pore through pages of reports and deciding what they consider more import and less important, a credit score is an instant number they can use to qualify you.

The score uses info like number of accounts, age of accounts (ie. length of credit history), types of different accounts, credit card utilization (balance relative to limit), any negative marks, recent HARD credit pulls (like when you apply for a loan, not just checking your own credit scores as that’s a soft pull).

Okay, so right now I don’t know anything about you. You’re just a person on Reddit. If I run a company that loans people money, then you are a complete unknown.

If I loan you money, will you pay it back? I have no idea. I need some information before I decide if I want to loan you money. Information like, how much money do you make? How much do you save? Do you owe other people money? How much? The last time you borrowed money from someone, did you pay it back on time? Have you ever declared bankruptcy? Have you ever had people sue you because you didn’t pay them back?

Those are all important things for me to know, if you are asking to borrow money from me. It helps me decide how big a risk you are. So, we have a system to figure that out. It’s called a “credit score”. There are several companies that can create an assessment of you, and determine how likely it is for you to pay back your debts on time. But if you have never had a bank account, never had bills in your name, and never borrowed any money, they don’t really have much information to go off of.

The first credit card you get is going to have a low borrowing limit, and a bad interest rate. Nobody is going to want to loan you a lot of money until they know more about how reliable you are. Generally getting a bank account, paying some bills that are in your name, and borrowing small amounts of money (and then paying it off) will help improve your credit score. It doesn’t happen instantly, you need several years of that to build up a good rating. But as long as you are paying your bills on time, you should be okay.