Many new immigrants to the United States may be dumbfounded by a cosign requirement to lease an apartment lease, or difficulties in getting a loan or rejections when they apply for a credit card. The reason these things happen? Because they donâ€™t have a credit history in this country.
If you plan to build a life and a career in the U.S., building that three-digit credit score should be a high priority once you enter the country. Without a credit history, you will face tremendous obstacles, financial and logistical alike, in your new life. Unfortunately, you cannot transfer your credit file from your home country to the U.S.
Good credit is critical throughout your financial life in America, from buying a car to leasing an apartment or obtaining personal loans. The better your credit score, the easier it is for you to access credit and the less a loan will cost you.
How do you build your credit without a credit history in America? Let us fill you in.
Before we discuss the specifics of building credit, letâ€™s first learn the very basics of a credit score.
There are several types of credit scores out there, and most scoring models agree on a score range of 300-850. FICO is the most widely used scoring model, provided by the Fair Isaac Corporation â€” its scores are used by 90% of U.S. financial institutions.
Depending on your specific score, the quality of your score falls into one of five tiers of credit. The higher your score, the better.
A â€śpoorâ€ť score typically falls between 300 and 579. â€śFairâ€ť credit scores are in the range between 580 and 669. â€śGoodâ€ť scores are between 670 and 739. â€śVery goodâ€ť ones are between 740 and 799. And â€śexcellentâ€ť scores fall between 800 and 850.
|Poor||Less than 580|
Your creditors report your borrowing, repayment history and other financial behaviors to three major credit reporting bureaus: Equifax, Experian and TransUnion. These bureaus generate your credit report; credit scoring agencies such as FICO then use the information in your credit report to assign you a credit score.
Your score indicates how likely you will default on debt. In the eyes of lenders, the higher your score, the less likely you will default on your loans. Banks, credit card issuers and other lenders make lending decisions based on a borrowerâ€™s creditworthiness. They offer lower rates to borrowers with higher scores.
Your FICO credit score is calculated by five factors, each of which carries a certain weight:
Note: LendingTree is the parent company of MagnifyMoney.
You can definitely build your credit from scratch by working to improve the factors that go into your score â€” except for the length of credit history. Itâ€™s impossible to travel back in time to open a credit account, so improving this factor just takes patience. Luckily, the length of your credit history isnâ€™t the most important thing that determines your score.
Your credit history starts from the moment you open your first credit account. Make it work in your favor by following healthy financial habits and avoid common missteps, which we will detail below.
Without a credit score to start with, you may not qualify for a regular credit card. What you can do is to open a secured credit card by providing the bank with a deposit as collateral. A secured card is a way to prove to a lender that you are responsible and a minimal risk.
The bank will keep the deposit, which is typically $200 or more, and give you a credit limit equal to your deposit. Your credit limit, balance and payment information are reported to the three major credit bureaus. If you fail to pay your credit card on time, the bank can take your deposit and apply it toward the debt.
Payment history is the largest component of your credit score. Making your credit card or loan payments on time is crucial in establishing your credit and maintaining a good score in the future. Payments that are more than 30 days late will start to hurt your score. At the very least, be sure to pay your bills no later than 30 days after the due date.
If you are concerned that you may be late on payments or miss them entirely, set up payment reminders or autopay.
The amount of debt you owe makes up 30% of your score, so you should be careful not to use too much of your available credit. Using a high percentage of your available credit could indicate that you are overextended and may be more likely to miss payments.
A good rule of thumb here is to keep your credit utilization ratio (the percentage of your available credit being used at one time) at or below 30%. That means a credit balance of lower than $3,000 balance for a $10,000 credit limit.
Once you have established credit, check your credit report regularly to watch your progress and make sure nothing has been mistakenly reported. Negative marks hurt your score and you should dispute the ones that are untrue to get them off your report.
The best place to get your credit report is at AnnualCreditReport.com, where you can access one free report from each of the three credit bureaus every year.
Some property management companies and landlords use electronic payment services that report payment information from tenants to credit agencies. If your landlord offers such a service, opt in to have your rent payment history reported to one or all of the credit agencies.
If you make on-time payments, your credit score may go up. Of course, the opposite can happen, too: Your score may slip if you miss a rent payment. Learn more about how to report your rent payments to credit bureaus.
You donâ€™t have to earn a perfect credit score of 850 to be considered successful or qualify for the lowest interest on loans. A more optimal credit score to work toward is 760. Anyone with a score of 760 and above will likely get desirable rates offered by lenders. A history of credit, on-time payments and decreasing the amount you owe will help you work toward this goal.
Try to stick with your very first credit card before you open other credit accounts. While itâ€™s important to have a number of different accounts, itâ€™s not wise to apply for a bunch of new credit cards in a relatively brief time period.
More new accounts generally pose more risk to lenders, and will also reduce the average age of your credit accounts. In addition, once you apply for a new account, the lender will check your credit score, which triggers a hard inquiry. A hard inquiry will cause your score to drop a few points.
Keep the first secured credit card you received, even if you donâ€™t use it later. This card will establish the length of your credit history. Most people choose a no-fee rewards card or a bank credit card as their first credit account, so it doesnâ€™t cost anything to keep the card for the length of your history. You can see a list of good no-fee rewards cards here.
As you build your credit, itâ€™s gratifying to see your progress. Keep tabs on your score, but itâ€™s not wise to obsess over it. Give it time; your score will increase as long as you follow the steps we discussed above. A difference of 10 or 20 points is not usually going to significantly change the rates you get or loans you qualify for.
Nothing in the scoring models suggest that carrying credit card debt month to month is beneficial. It is totally possible to establish a good credit score by paying off your credit card on time and in full every month. Donâ€™t plan to pay interest â€” in other words, donâ€™t pay just the minimum payment â€” to build your credit score. It wonâ€™t help with your score, and it will cost you a staggering interest payment.
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