Why you should build your credit score early and how to do it easily?
One of the tough parts of moving to a new country as an international student, new immigrant, or foreign scholar is finding the funds to help you get settled in your new environment.
Regardless of which category you fall in, if any of these situations, listed below, apply to you, then you need to have a great credit score:
- Need a student loan
- Need to buy or finance a car
- Need to rent an apartment
- Need to buy car or home insurance
- Need to buy a house
- Applying for a job
What is a credit score?
A credit score tells financial institutions how financially responsible you are. And how much of a risk you are to them. While there are three different credit bureaus and several different credit score scales, credit scores range from 300-800.
- 300-620 – Bad credit
- 620-659 – Fair credit
- 660-699 – Average credit
- 700 and above – Excellent credit.
Here’s why having a great credit score matters…
Having a great credit score means you get the best interest rate which will save you tons of money.
When I moved to the US, I needed a car. And since I did not have enough money saved up to make this purchase, I had to finance the car.
Now here’s what I did not know. Because, I was new to the country this meant that I had no credit history in the US and my Canadian credit history does not transfer over. This meant that I was a high-risk customer. As one car salesman put it, ‘Having no credit history is worse than having bad credit.’
So, since I absolutely needed a car, I still got the car but with a very high interest rate. I ended up with a 19% interest rate on a $20,000 car. Which meant that at the end of my loan period, this car had cost me $31,000 with all the interest payments. That was an extra $11,000! Had I had a better credit score I could have gotten an interest rate of 3% and the car would have cost me $21,500. So only an extra $1,500 in interest. Not bad!
Here’s what I should’ve done instead.
- Started building my credit history right away.
- Refinanced the car pretty soon after I got a decent credit score.
- You can continue refinancing the car as many times as you want as long as you get a better rate and there are no fees to refinance. Credit unions usually give you great rates with no fees to refinance.
But why does my credit score matter if I’m renting an apartment?
Because it lets the renter or employer know that you are a financially responsible person. Which means that the chances of you paying your rent on time are higher. So low risk for them. They may be more willing to give the apartment to someone who has better credit.
Why does my credit score matter when applying for a job?
Employers usually do a credit check when the job involves handling money or handling sensitive information. For instance, jobs such as government or medical jobs or even finance positions such as a cashier, banker, or company purchaser require a certain amount of discrepancy and financial responsibility.
While employers do not see the same report as a lender would, they will know of any negative records in your credit history. This would be a red flag for you letting the employer know that you may not be financially responsible or mature to handle such a position.
So you can see why it’s important to establish a good credit score sooner rather than later.
How to establish a good credit score early and easily
- Start building your credit. If you already have loans or credit cards then you are already establishing credit. If you have neither, then start with getting a limited or no credit history credit card. Click here for a list of the best credit cards if you have limited or no credit history. These cards report to all three credit bureaus so you can build your credit faster.
Use the credit card to purchase small items or to pay your cell phone bill. At the end of the month, make sure to pay off your credit card bill in full. This will help establish your track record and build your credit.
- Use your credit card wisely and responsibly. Remember, a credit card is not free cash. Know your credit limit and pay it back in full and on time to avoid fees and interest.
- Consider paying your card in full. Paying your bill in full ensures that you do not get charged any interest fees. I usually pay off my purchase as soon as I get home, which also keeps me aware of my budget.
- Pay your bills on time. Making a late payment can negatively affect your credit score. They also result in late fee charges and interest on the money you haven’t paid back yet. So try to make your payments on time. I get around this by either paying off my purchase as soon as I get home and also setting up autopayments from my bank to my credit card. That way, I never run the risk of forgetting a payment. Just make sure you have the funds in your bank account to cover the credit card payment. You also want to check your credit card to make sure the charges on your card are all yours. If you find a discrepancy in the charges on your card, contact your credit card company right away and they will take care of it for you.
- Try not to use up all your credit. Lenders like to see that you are using around 10% of your limit. Going beyond 30% of your credit limit signals a lender that you might be at risk of defaulting on your payments. However, this can be hard if your credit limit is low and you need to make a big purchase. As I mentioned before, you can still make the purchase, just be sure to pay it off right away.
- Monitor your credit report.
Signup for a free account with CreditSesame. This way you can watch your credit grow and also keep an eye on your credit report to monitor any fraudulent activity.
While credit scores play a big role in determining whether or not you are eligible for a loan, they are not the only factor. Other factors such as your job, income, financial history etc are also considered. However, to give yourself the best options, it is in your best interest to establish a good credit score.
Here are some of the major factors that go into determining your credit score.
Following these simple steps will build your credit and enable you to get a great interest rate on that next car or home you want to purchase.
How fast have you built your credit score? What tactics have you used?
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