Knowing the German banking system, the US system is really strange and old fashioned.

In Germany direct deposits are common since the 70's. Only when you traveled within Europe you used checks and also that ended already in the early 90's by introducing a debit card which was valid at ATMs within the EU.

But the strangest thing and most difficult topic to adjust to is the US credit scoring system. 

Because it is so important to have a good credit you need to understand this system when you are looking to get a loan at a good rate.

We learned several parts the hard way, because we tried to apply common sense. But that doesn't work.

Therefore I made some research about this topic and made my notes. When I was putting the notes together I thought these information are of some value also for our tenants as well as a lot of other people.

I hope you can use it.

The following picture shows the contributors to your Credit Score:

Lets take them apart since you need to spend attention to each area:

1. Payment History

The most important contributor. The rule here is pretty simple. MAKE YOUR PAYMENTS ON TIME!
One missed payment wrecks your score significantly down, not to mention foreclosure or bankruptcy.

2. Amounts owed:

This refers to your utilization of your available credit. The lower the better.

Definitely you don't want to go over 50%, keeping it below 30% and you are doing quite good, if you can keep it below 10% you are on the way to become best in class.

Example: If you have an available credit of $10,000 you should use only $3,000 to avoid a negative impact to your score.

The conclusion out of this category is you want to have as much available credit as you can get. If you have already several credit card accounts you should try to increase the limit instead of opening new accounts, which refers to point 4.

Contrary, when due to whatever reason your available credit shrinks and you don't adjust the amount you owe, then your utilization goes up.

So never close an existing account, instead keep them active by using them at least once withing 90 days. Otherwise it may happen that it gets set inactive by the issuer. And even if you let went an account inactive because it provided only a minor additional credit, keep them. Don't close it, see next point.

3. Length of credit history

Therefore it's called credit history. Pretty much self explanatory, the longer your history is the better. So start as early as possible to establish your credit history.

Time is here your partner.

4 New credit

You are looking to open a new revolving account, loan, mortgage, credit card, .... That's good, as we have learned earlier. But at the beginning it will hurt your score since each inquiry will be recorded by the bureaus and reduce your score.

Try to keep the impact as little as possible, by keeping the amount of inquiries as little as possible.

E.g. Don't let the car dealer copy your drivers license (the need and use it to pull you credit) until you know you want to by this car. Or when shopping around for a new mortgage or refinancing do the shopping fast within 2 weeks, since one time per week all inquiries within this 2 week period will count just as one. 

5. Types of credit used

Lenders want to see that you can handle different types of credit. So develop your credit portfolio.

You probably start with a credit card, but later you add a car loan, and further down the road a house mortgage is added, perhaps you have installment loans.

I think you get the picture about this one. But be careful with consumer credit, one account is OK. Don't do more. Regarding credit cards you want to have at least 3 (of course over time) more are OK as long you can manage them. And this doesn't mean you have to keep a balance on them. If you can pay them of every month, that's the best.

OK, what now

Take control! Therefore you need to know your score. I've a subscription with one of the credit bureaus. On this way I know monthly my actual score, I receive an alert when something changes (good ;-) and bad ;-( things). Additionally I get to know when the different banks and credit card companies report to the bureaus. All of them are doing it on a different day within the month.

This information is of great value, since I can now pay balance on my credit cards off before they get reported. On this way I minimize my utilization which improves my score.

If your score changes make sure you know why! Quite often false information at the credit bureaus are discovered. You can fix that by filing a dispute. E.g. If there is a false late payment which definitely brings your score down by 60 or more points, get in contact with your bank so that they remove this from your report. But this often takes at least one month. If it needs to go faster file your dispute directly with the bureau by providing evidence that the entry is wrong. You may get it of withing a couple of day's.

So I hope this Information helps.

If you have questions feel free to contact me.

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