How To: Credit History in the US

You can't get around a credit history in the US. Even if you are not intending to take up a loan, you will, sooner or later, need a Credit History Report. But how do you get such a credit history and what is it good for?

The following article was written by Mr. Christian Schimanski, an expert in the field. You may contact him under credithistory@web.de.

For many years now it has been customary in the US to obtain certain data of a customer before granting even the smallest credit. And a credit doesn't necessarily have to be a loan! It doesn't matter whether you want a car insurance, a landline or a new house. You will always need to provide certain data to prove to the provider that he isn't taking too much of a risk. These data will be compiled of different information sources, which are constantly collecting the newest data. Even insurance companies are more and more often checking their customers to find out whether they are among their desired clientele. The most important redit agencies in the US belong to Experian, Equifax, and Trans Union. These agencies meticulously record every action of the customer and constantly calculate the current Credit Score.

Here is a brief overview:

Definition Looking at a person's credit history means looking at a person's financial background.
It is being established how creditworthy a person is. With the help of a special formula that each agency has developed for itself, a number is calculated to compare one person to other persons. At the same time, this number often is the requirement for a certain loan offer.

What exactly does this contain?
Provided information is:
- employment information, how much money has been earned where
- Score information
- Information about current credit limit, and the resulting monthly burden
- Canceled credits, with the information of who has canceled it
- How often and when payments to the creditor were late
- Non-performing loans
- Forcible collection by a creditor
- Financial court ruling (e.g. admission of bankruptcy)
- Number of inquiries to the credit agency
- Stage names and aliases
- Social Security Number as reference number

What is a Credit Score? The Credit Score is a number between 375 points and 900 points. The more points you have, the worthier you are of a credit. Certainly, you don't have to have the full 900 points in order to get a loan. However, a lower number means a higher risk for the banks and this you will have to pay for. Anyone who has seen or heard commercials for financing a car on US television or radio will have heard "qualified customers only" or something similar. Because not everyone will automatically get the promised financing plan for the new car at the advertised conditions.

Since every credit agency works according to its own rules and independently of the others, you will often get three different credit scores. This is because each agency has its own formula for evaluating the customer and/or one or several pieces of information may not have been known to all the agencies.

For what do you need a good Credit Score? There surely are an indefinite number of situations in which a credit history is necessary, so please forgive me if some of them are missing from my article. This is merely an excerpt of some customary situations.

Everyday: Even the simplest things in the US require a good credit history. You will certainly learn that when you try to have a landline installed. If you don't meet the requirements for new customers, prepare yourself for an exorbitant deposit. This is different from Germany where practically anyone who hasn't received a cancellation by the Telekom may get a landline installed.

And then there is cable TV, cell phones, electricity, gas, water. All of these look at the customer's credit history in order to find out about their new customer. You see that these are things out of everyday life that you will have serious difficulties with if you have a bad credit history.

Acquisition of real estate: While in Germany the main focus is on the collateralization of construction financing and you "only" have to prove that you have the income to take up the loan, things are a little different in the US. As mentioned before, even a little mistake can mean that you won't be able to buy real estate and only because you forgot to pay a bill once you don't have the necessary points to get your loan.

I have had customers myself who, because they didn't know any better and due to the German "do it yourself" mentality minimized their credit worthiness. In those cases they wanted to save the costs for the professional support of a mortgage broker and, just like in Germany, went to the bank themselves. They had always paid on time and so thought they didn't need a mortgage broker. But due to this high number of inquiries the credit score was so low that they had to accept a higher rate of interest.

By the way, the same happens if your shopping at car dealerships if you give away your social security number too easily. It takes a while before your score has recovered.

Built Credit Basically, getting a loan is easier for an American who has born into the system than for an immigrant who has only been in the country for a short while. The main reason is that Americans have been "watched" by the credit agencies since they were young and thus have a better and more exact result. The game begins as soon as you get your social security number.

That's why after arriving and getting your social security number you immediately start building a credit history. Time is an important factor for building a credit score.
Each lost month, each lost year can be a significant obstacle for the immigrant. The time factor counts for ca. 15% of the calculation and it is the factor that is easiest to fulfill.
And it doesn't take forever to make up for the disadvantage you have in comparison to your American competitors. After approximately two years your efforts will pay off and offers will come snowing in. Provided you pay on time and nothing negative occurs. However, not every good offer is as good as it may seem at first glance! There are both positive and negative behavioral patterns that can make your credit score go either up or down.

To mention just a few points:

Improves your credit score:
- Pay your installments on time (ca. 35%) (better pay a little early than too late)
- Appropriate number of loans
- Not too many credit cards / small loans
- Length of entire history (ca. 15%)

Worsens your credit score:
- Out of scale loans (ca. 30%) (for example, all credit cards maxed out to the last Dollar)
- Late payment of your installments
- Too many inquiries over a short period of time (ca. 10%)
- Frequent change of residence

And a short explanation of some frequent terms:

"Bad Credit:" Bad credit means that you had already been established as being creditworthy but haven't paid your installments on time and/or the credit has become a bad credit. You haven't paid installments, liquidated collaterals or similar things. Credit score: 375-619.

"Bankruptcy:" The debtor had a non-performing loan and was unable to pay the creditor. This admission of bankruptcy allows you to start over, even if most loans will be denied at first. A bankruptcy is a new beginning financially, you start over completely. Old debts will be cancelled. After about 7 years, the bankruptcy will be erased from your Credit Report. You are completely rehabilitated.

"No Credit:" This is your status when you have just obtained a social security number and thus have no credit listed on your report. You are like a new-born who doesn't have a good or bad record at all. In this stage you will probably not get a credit anywhere. You can, however, apply for a "secured credit card" (a credit card with money you deposited as a security). Some car dealers will even finance cars at higher rates.

"Credit Score 0" (your report is almost empty)

"Good Credit:" That's the status you are working toward at first. You fulfill all the requirements, but this has to be tested a while still. Credit Score: 620-769

"Perfect Credit:" There's not the slightest negative fact in your credit report. This level has been maintained for 2 years. Credit Score: 770 and up.

You will mostly hear these terms in advertisements, commercials and on the radio. There are no specific regulations about when you reach what stage. They are more like key words to roughly describe your creditworthiness.

Where do I get a copy of my credit history? Only the applicant or a person authorized by him can obtain this information. However, SSNs are often being abused, especially if you give it away freely. The famous "pre-approved" credit cards with a certain limit that you get in the mail freely sent inquiries to the credit agencies.

Depending on the state the credit agencies charge between $0-$10 fees for a copy. In case your spouse or co-borrower needs a copy as well, the fee will double. You have to call or write to the appropriate credit agency in order to get the information. However, it is simpler and also cheaper to ask a Mortgage Broker Corp. and pay a lower fee. It is certainly best to get information from all three agencies at the same time, but also most expensive. However, that way you have your complete history and not only 1/3 of it.

The only advantage if you inquire yourself is that no points will be taken off.

Advantage of a good Credit History and good consulting Once you have achieved a good creditworthiness, the financial limits will also be more generous than without one. I can only recommend to consult a mortgage broker if you want to acquire real estate or built a house in the US, so you won't have to deal with the unknown matter yourself. On first glance it may seem unusual and expensive to the German eye. As mentioned before, the better consulting pays off in the long run. That's why you should hire someone who deals with the financial matters in your favor.

Conclusion Generally speaking you can say that the whole evaluation process that is done by an experienced expert in Germany, is organized in a simpler, similar form in the US. That way, it is easier for the money lender to get a complete picture of the applicant and compare him to others. If you know how, the Credit History isn't too great an obstacle. You should start building your credit history in good time. And at the same time you should start getting to know the conditions and, if necessary, get expert advice.

Christian Schimanski
Mortgage Loan Originator, banker

Editor's note: As mentioned above, the author of this article has agreed to answer questions about this article or the credit history in general. Please contact him directly via his email address: credithistory@web.de

Please note:
It is possible that this information doesn't apply to all US states. However, this would go beyond the scope of this article and not contribute to the clarifying of the subject. The examples in this article are for the state of Florida.

We don't take responsibility for the correctness of the information provided by the author.