How to build credit

A recent study conducted by CNN showed that now even insurance companies, landlords, and employers pay attention to credit history. According to statistics, one in four Americans seeking a job is screened through a credit bureau. Administrative authorities have tried to intervene, recommending that they first obtain the consent of the candidate for processing his data. However, no one can interfere with the employer’s decision to subsequently refuse employment.

Opening an account with a bank

It would appear to be the simplest operation, but not everything is so easy. To open a savings account and a checking account in a bank, an applicant needs a form of government-issued picture identification, a Social Security Number (SSN) and proof of your address (utility bills, rental or purchase agreement). With those documents and a typically brief conversation with a bank representative, in about twenty minutes, an applicant will have a folder containing a bank agreement and the relevant account details.

The same is relatively true with the opening of a credit card. A customer chooses a package of services, provides valid identification, for example, a driving license that is scanned, and the card is sent by mail in a week.

At Bank of America, a customer can immediately open and accumulate accounts for children by either immediately depositing $300 (or more), or making monthly deposits of $25 to reach the amount of $300. In comparison, Wells Fargo turns out to be the friendliest bank and allows a customer to open an account with only two IDs—a passport and a driving license.

Checkbook

It is only in the movies where the hero can write a check for one million dollars without looking; however, in reality, an account owner needs to be more careful with a checkbook.

First, an owner must always be sure that there is money in the account to which the checkbook is attached. It sounds ridiculous, but in practice, the bank deducts a $35 fee, if the person to whom you issued the check has deposited it and the account does not have sufficient money to pay the check.

Secondly, when the account or card is blocked, the check system is also blocked. That is, if a customer pays for a service, e.g. electricity, with a check using an automatic system of payment by phone and it is revealed that the account is not available, the bank again will deduct a fee of $35.

Moreover, a checkbook can never be left unsecured, because any person can fill out a check on the owner’s behalf. Thus, it is always better to be careful with a checkbook and to know exactly how much money is in the account. Conveniently, today an account owner can check the account balance using a smartphone application before writing out a check, and does not have to run to a bank to replenish the account or transfer funds.

The beginning of credit history

In case a consumer lacks a credit history, they should start building one as soon as possible.

Consumers also can obtain secured credit cards. Namely, in a bank where a customer already has an established debit card, the customer could open a new card by depositing between a minimum of $300 and a maximum of $10,000. The funds are then used as security for credit card transactions.

It is not recommended to use more than 50% of the funds and to repay the debt immediately. There is a function of “automatic redemption” from a debit card. In a few months (usually six), the bank will offer a standard credit card. In a year, it could be possible to apply for a car loan, and in the absence of delinquency and the availability of a permanent job, in two or three years, a customer could obtain approval for a mortgage.

Who counts credit scores?

The company FICO, which created this system of scoring, is aided by three credit bureaus (Equifax, Experian, and TransUnion) which maintain records of a consumer’s credit history. Additionally, other banks and contractors are involved in the counting of points, and through contacting them, consumers can obtain their score.

Credit score

The types of points include: standard bank cards, personal financing, mortgages, car loans, and NextGen points. Credit scoring ranges from 300 to 850. For example, in 2013, 37% of users of banking services had from 750 to 850 points. FICO points on bank cards vary from 250 to 900. FICO points on mortgages are respectively 300 – 850. The higher the score, the fewer risks the bank has and the better the client’s solvency. There are four types of scores: 1998 (FICO 98), 2004 (FICO 04), 2008 (FICO 8), and 2014 (FICO 9).

Annually, consumers can check their credit score free of charge in three ways. First, consumers can use the AnnualCreditReport.com website. Secondly, consumers can call 1-877-322-8228 to place a request by phone. Lastly, consumers can request their score by sending mail to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. Consumers need to provide the following information: Name, SSN, current address, previous address, date of birth, and phone number.

How to calculate the credit score

In the US, Canada, and many other countries, FICO counts points. Specifically, FICO looks at the behavior of the borrower/payer, and according to wikipedia.org, the division is roughly the following:

  1. History of payments – 35%: including the presence or absence of overdue bank payments, penalties, refinancing, bankruptcy, seized property, the property that is put up for auction, and petitions for deferred payment. The more occurrences of these items, the worse is a payer’s history.
  2. Promissory notes – 30%: including three components.
    • Credit card debt, also called “renewable use”, is calculated using the following formula: (Credit card balance/credit card limit) x 100%. The higher this percentage, the lower the borrower’s credit score.
    • Fixed payments, for example, a car loan—a fixed monthly payment for 36, 48 or 60 months. Usually, the deposit itself is the object for which payment is made.
    • Open debt, which is rare.
  3. Statute of limitations – 15%: The earlier the credit history began, the more stable it is.
  4. Variety of account diversity – 10%: the more different current or repaid loans (e.g. car loan, mortgage, loan for household appliances), the better, as this means that a person can manage their finances in different spheres.
  5. Requests for new loans (inquiries) – 10%: Every time a borrower wants to take a loan (even a point card in a supermarket), a request is sent to one or more of the three credit bureaus, where these requests are stored. The fewer requests (especially with denials), the better for a consumer’s score.

Auto Loans

It is better to forget the advertising posters of car dealers with magic percentages. The deals are all a hoax or are calculated for those dealers who have already been fully paid the cost of several cars. If there is a down payment of 30-50%, then there are no problems with obtaining a car loan. It is better to refrain from the temptation to buy a car for cash from a dealer or on Craigslist.com and use the services of the bank. The car loan can be repaid quickly, and at the same time greatly improve your credit history.

As mentioned, with two years of continuous (and necessarily good) credit history and a permanent job, a consumer can consider buying real estate. Typically, when a consumer chooses a house or apartment, they can find out, even on a real estate website, whether there is a preliminary approval of the mortgage based on their points (credit score).

Effects

Many goods and services are bought using credit. As credit has become more accessible to the population, banks and financial institutions bear greater risks. Accordingly, for this purpose, a standard credit score system was introduced. As described above, it is better not to ask to seek credit too often, because inquiries can lower the overall score since the activity indicates a person needs a new loan. This can mean that a person is not in a very good financial position. Moreover, the interest rate on a new loan may be significantly different for people with a “good” or “bad” credit history. However, most importantly, a borrower should pay on time.