Credit plays a crucial role in the financial lives of Americans. If you’re unfamiliar with the concept or coming from another country where credit is different or nonexistent, this will help to explain it.

What is Credit in the U.S.?

In the U.S., credit refers to the ability to borrow money or access goods and services with the agreement to pay later. This system is built on trust, with lenders assessing your reliability based on your credit history.

The basis of the U.S. credit system is the credit score, a three-digit number that reflects your creditworthiness. Think of it as a financial grade that lenders, landlords, and even some employers use to evaluate your reliability.

How is Credit Scored?

The most common credit scoring system in the U.S. is the FICO score, which ranges from 300 to 850. A higher score indicates a lower risk for lenders. Several factors affect your score:

Payment History: Do you pay your bills on time? Late payments negatively impact your score. To avoid having late payments, check the payment due date and set reminders to pay your bill on time. In addition, you can reach out to your bank to set up auto-payment. However, auto-payment does not always work so check and make sure each auto-payment actually goes through.
Credit Utilization: How much of your available credit are you using? Ideally, use less than 30%, and never max out your credit limit
Credit increase: Never refuse when your bank allows you a credit increase as it is a soft pull in your report. Asking for more credit is good also but it might affect your credit temporarily.
Length of Credit History: How long have you had credit accounts? Older accounts are better.
Credit Mix: Do you have a mix of credit types (e.g., credit cards, auto loans, brands credit cards, personal loans, mortgage)? A diverse array of credit can help.
New Credit: Opening multiple accounts in a short period can hurt your score.

Building Credit

Unlike in some nations, where debit cards and cash are more common, Americans frequently use credit cards to pay for things everyday. Using a credit card responsibly is the easiest way to build credit. That means paying your bill on time and in full every month to avoid interest charges.

Other ways to build credit include:

Why is Credit Important?

Taking out a small loan and repaying it on schedule.
Being an authorized user on someone else’s credit card (often a family member).

Your credit score affects more than just your ability to get a loan. It can determine:

The interest rate on loans and credit cards.
The ability to rent an apartment or qualify for a mortgage.
Car insurance rates.
Even job prospects, as some employers check credit scores during hiring.

Final Tips for Navigating Credit in the U.S.

Start small: If you’re planning to stay in the U.S. long-term, consider opening a secured credit card to establish credit history.
Monitor your credit: Websites like Credit Karma allow you to track your score for free.
Avoid debt traps: Pay off your credit card balance each month to avoid high interest rates.

Understanding and using credit effectively can be instrumental to opening large financial opportunities in the U.S. It may seem complicated at first, but mastering the system is key to thriving in American financial life.