Saturday, July 13, 2013

Credit history - Guidelines

To be able to have a flourishing house hold, it is important to have a good credit history.

If you are student, coming to US on F-1 visa for the first time, it is very important to understand that credit history is an important element of your economy here. I am from India, and in India there is nothing like credit history being recorded for anyone. Anyways, this philosophy of credit history was not much useful to the US to stop the 2008 economic crash nonsense. Still they stick to it.
In India, the payoff capability for a credit is measured by the earning capacity of the individual. This is NOT how it works in the  US. I earn more than 100K in the US, but I did not have a credit of more than a 1000$ for a long time. Disgusting? In India, I had a credit 5- 7 times my monthly salary. Not only that, I was not allowed to have more than one credit card on account of a bad credit history. I could not take car loans and blah blah.

Here is what I would suggest to a student, especially, Indian students, who have been exposed to an economy completely different than that in the US.

  • Open a bank account with a credit union,  rather than going with names like Wells Fargo and Bank Of America. The reason is that they are not well suited for your needs yet. Once you start earning, go ahead and open accounts with them. 
  • The big banks are more hesitant in lending you a credit card. Credit unions are not. In fact, they lend you a good credit. Banks like Wells Fargo would offer you a secured credit card which they give you against a collateral. Any purchase would build a credit history for you. They say it is a good starter: But there is a catch. It is good only when you have a larger collateral, say 1500-2000. I started of with $300 which was bad because I thought I would just be able to spend that much for the month. I was wrong.
  • Do not spend more than 10% of your credit limit, ie. keep your debt to credit ration as low as 0.1 . Keep spending with your debit card as much as you can for the first year. This is going to build you good credit points. I would spend almost every of the $300 and would refill it at times in the middle of the credit cycle. BAD. 
  • It is good to have on of the utility bills or the gas bills on your name. If you are sharing apartment, have one of the bills on your name. These amenities bills also are counted as credit since they are giving you all this assuming you would pay back at the end of the month. This is important, don't forget.
  • Time to buy a new car - Yes, you started earning and you want a car. You go for a 8000 used car - all good and nice. You don't want to spend much on a car and that 8000$ is what you saved for a car in the whole of last year. Great. Now DON'T buy the car with a 100% cash payment. I know its cool and sexy and whatever..but you are loosing a chance to build a credit history. If you don't finance this car, no future creditor is going to have a chance to look at your credit performance. You need to do good at 10000 before you could play for a 500000 housing loan. Got it? So, finance the car and pay some interest for next 3-5 years but earn the credit point. They are important.
These few essentials are definitely going to help you maintain a good credit score - > 730 within a year of your entry into the US and in years after that.

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