What is credit?
Simply put, credit is the value of money that someone, such as a bank or credit issuer, has lent you and that you have promised to pay back, usually with interest.
This could include car loans, mortgages, and contracts for services such as a cell phone account or line of credit on a credit card.
When you apply for credit, lenders typically check your credit to help determine your ability to repay the debt. They will do this by reviewing a credit history report, which shows your past financial behavior. If the lender approves your credit application, you can report your account details to any of the three major consumer credit reporting agencies: Equifax, Experian, and TransUnion.
Details about your credit accounts, such as your payment history and balance, can be used to calculate your credit scores. There are many companies that use different formulas to calculate these scores, but the two main ones are VantageScore Solutions and FICO®. These two companies use models that produce credit scores ranging from 300 to 850.
Scores of about 700 or higher (on a scale of 300 to 850) are usually considered good. Lenders typically look at your scores to determine whether or not to give you credit and help set the terms of your contract with them; for example, how much interest will you pay. Please note: Debit cards, prepaid debit cards, and payday loans may not help you establish credit because account details are not typically reported to credit reporting agencies.
How are US credit reports and scores generated?
Credit reporting agencies collect and store information about your credit behavior. That information is usually sent to you by lenders, such as credit card companies. One important thing to know is that these companies are not required to report any information to the aforementioned agencies.
Credit reporting agencies use the data they collect to generate your credit reports and may also calculate your credit scores. When you apply for a loan, your potential creditor may look at your credit reports to help make a loan decision. Also, once a year you can order your free credit reports from each of the three major consumer reporting agencies.
Since lenders use US credit reports to get a complete picture of how you manage money and credit, the reports can contain both positive and negative information. This is different from the way other countries treat credit. To protect consumers, there are laws that say what can influence your scores and what can be included in your credit reports.
For example, your immigration status will not be included in your credit reports, and lenders cannot discriminate against you based on your situation.
But keep in mind that when you apply for loans or credit cards, the lender may ask about this detail. The lender may decide not to give you credit if they think you won’t be in the country long enough to pay off your debts.
Where do I find reliable financial information?
Unfortunately, scams are prevalent in the United States, and newcomers or people who don’t speak English well may be more likely to fall victim to scams. It is also possible that you are not used to how money works in your new residence. Finding reliable financial information can be difficult for an immigrant, but it is extremely important.
“I would advise immigrants to be very careful about where they get the information they’re looking for,” says McClary. “Many times you will get financial advice from a friend, a neighbor, a person at the grocery store, or someone you randomly ran into. And it may not be well-informed advice.”
McClary advises consulting the following resources:
- At Credit Karma, you can view two of your credit reports for free, from two of the three major consumer credit bureaus: Equifax and TransUnion.
- The Consumer Financial Protection Bureau has compiled a guide to managing money for people who speak Spanish.
- Consult a nonprofit credit counseling center, such as the National Foundation for Credit Counseling. Local partner agencies can help you find certain financial resources in your community.
- The Federal Trade Commission offers tips on how immigrants can avoid scams and general advice on managing money and credit.
- Credit unions may offer cards or other products for your situation. They can also organize financial workshops for immigrants.