DECEMBER 23, 2020 | East West Bank
In the U.S., personal credit is an important tool for consumers. It can help you buy a car, rent a house, get a loan to start a business. Consumers with good credit history typically have more choices for financing options. However, building a good personal credit history is not a quick or simple process. Here are some useful tips to help you get started and to improve your credit score along the way.
When lenders review your credit, they want to know how reliable you are. Whether you pay your bills on time in the past is a good indicator of your future performance.
Therefore, make sure you pay your bills on time — not just credit card bills or loans (such as an auto loan), but also your rent, phone, and utilities bills.
Also, if you can afford it, pay down your balance every two weeks rather than once a month, because this can help lower your Credit Utilization Rate (also called Credit Utilization Ratio).
Credit Utilization Rate is a debt-to-credit ratio. This is another important factor in the calculation of your credit score. A low credit utilization ratio tells lenders that you have not maxed out your credit card. This shows that you can manage your credit well.
Here is the example of how Credit Utilization Ratio is calculated:
If your total credit limit across all your credit cards is $1,000 and at this time you have $300 credit card balance, then your credit utilization ratio is $300/$1,000=30%.
If you want to reduce your Credit Utilization Ratio by half, one possible way is to ask your credit card issuer whether they will increase your credit card limit. Some issuers are willing to consider that for long-time customers who have good records.
If you recently moved to the U.S. and have no credit history, it can be difficult to get an unsecured credit card. Even if you get an unsecured credit card, the credit limit is usually very low, which will impact your Credit Utilization Ratio.
One alternative is to get a secured credit card and make sure your credit card activities will be reported to consumer credit bureaus. A secured credit card is a type of credit card where you make a deposit into a checking account that “secures” the line of credit. For example, you can put $1,000 as a deposit and get a line of credit for $1,000.
When you look for a secured credit card, choose the one that gives you the highest credit limit, since this can lower your Credit Utilization Ratio. You also want to ask whether the secured credit card issuer will report your credit card activities to the consumer credit bureaus such as Equifax, Experian, or TransUnion. Also, if you recently moved to the U.S. and have not obtained a U.S. Social Security number (SSN) yet, there might be a few financial institutions offering such cards without requiring an SSN.
After you open a secured credit card, make sure you use your credit card often enough so that you have adequate activities that can be reported to the consumer credit bureau. But remember, do not overspend as you still need to maintain a relatively low Credit Utilization Rate and definitely pay your bills on time.
Since the Credit Utilization Ratio is very important, the higher total credit limits you have, the higher the credit score you will likely receive. Therefore, keep unused credit cards open, as long as they don’t cost you annual fees.
Identity theft or other personal credit abuse could happen. It is recommended that you check your credit reports at all three major credit bureaus (Equifax, Experian, and TransUnion) for any inaccuracies. Incorrect information on your credit reports could hurt your credit scores. If you see errors, make sure to dispute the transaction and get the information corrected right away.
Any content, advice and forecast ("information") in this article is for informational purposes only and does not represent East West Bank's opinion or advice. As such, the information is not intended to provide, and should not be relied on, for professional investment, accounting, legal or tax advice, or medical advice, diagnosis or treatment. You should consult your own investment, accounting, legal or tax advisors, or physician or other qualified health provider before engaging in any activity. East West Bank does not verify the accuracy of the information provided in this article, and is not responsible for any errors or omissions, or for the results obtained from the use of this information.