Why do you need so many credit cards in the US?
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Every American has much more than just a credit card, and for every little thing one of these cards is used. One or two of you has probably wondered why that is. When I wondered about the many credit cards of my predecessor at the cash register, I wanted to know exactly. So I asked my daughter in law why do you need so many credit cards in the US?
She knows my curiosity about her home country and of course explained it to me patiently, which in my case was not so easy to understand. Your statement has shown me that we Germans are very different from the Americans in terms of payment behavior. Most of us only spend the money we have, the Americans pay almost everything by credit card.
Credit Cards in the US?
In order to prove a good financial history!
You have to be able to prove a good financial history, otherwise you will not easily get a new loan. But if you have no credit history at all, that is even worse.
The American credit institutions reward credit-financed payments if you do not exceed the granted credit limit and are always done on time. You then increase the credit card availability frame. Thus, the reliable payment of all bills and credit cards gradually leads to the establishment of a good credit history. This one needs, for example, to buy something on installments or to rent an apartment, even to complete a mobile phone contract.
If a credit card is not used, it will be closed by the bank and the credit limit will deteriorate.
An example of the credit limit (credit line) in the USA!
Each credit card increases the maximum credit limit of the owner. Assuming you own a $ 10,000 credit card and have no other credit. Now you are planning to buy a house and go to a bank where the credit history check is done. For the bank clerk, this looks like you've been trusted by other banks with only $ 10,000 in the past. The chances of getting credit deteriorate.
However, if you have 20 credit cards with a limit of $ 10,000 each, all of which is paid off, then the processor sees you have a maximum credit limit of $ 200,000 and you can handle large amounts. This increases the chances of getting the loan.
Establishing the credit history, so the financial history takes many years. The example below took 15 years in the case of my daughter-in-law. At the age of 16 she got her first credit card and had to learn to handle it responsibly. It is not possible to simply apply for many credit cards to increase the limit. Whenever you apply for a new credit card, a credit check is made. Here, among other things, the length of the financial history is examined. If this is short, you will not get the requested credit card. When that happens, so a credit card that has been applied for is not granted, it worsens the credit history. Not granting the credit card shows a future bank that another bank has not trusted the person to handle the responsibility of an additional card.
Credit Score and Credit History, what is it?
Only if you have a credit card in the US and can prove a credit history, you get a credit score. This is then crucial for the approval of a new loan.
This credit score is a score of 300 to 850 and gives information about the creditworthiness of a consumer. A score below 600 indicates that you have had too much open credit in the past, or have difficulty repaying your debts. A score of 660 and 724 shows that a borrower has a fairly long and mostly positive history of loan repayments. Values over 720 indicate that a borrower has a very solid credit history and is reliable.
The credit history thus refers to the past credit actions of a consumer and is a record of his repayment behavior.
Anyone who has not taken credit card or credit in America has no credit history. Without this, a car purchase or installment loan is hardly possible. The search for accommodation is also a problem because even private landlords have the opportunity to query them.
What is the American credit score composed of?
In essence, one can easily estimate the future credit score. It does not matter how much you earn, but only how much you have spent on loans.
A funny example is Warren Buffet. The richest man in the world has a credit score of just 718. That's because he does not like credit. He still lives in his house that he bought in 1958 for $ 31,500 euros. Of course, the house has long been paid off. With a fortune of $ 78 billion, he does not really depend on additional credit. In the eyes of the credit score, however, this looks like Warren has only an average credit rating.
5 factors influence the American credit score!
Payment history (35%) on-time payments, bankruptcies, etc.
Open credits (30%), how much do you owe in comparison to the granted credit limit? As a rule of thumb, you should keep credit utilization in the range of (9%). In this way one shows a responsible handling with the credit cards. This ensures that the cards are not closed by the banks for non-use.
Long history (15%), when does the person have credit cards.
Types of credit (10%), paid credit cards and loans based on assets are good for the credit score as long as they are always paid on time.
New loan requests (10%), new requests are a double-edged sword. If a new loan is granted with each request, then the score increases. If one is rejected, the American credit score deteriorates dramatically.
Why do you need so many credit cards in the US?
Thanks to the detailed explanation of my daughter-in-law, I know that now exactly. Now, do not be surprised if somebody even pays a euro with a credit card. Because only then does his score increase.