How Newcomers Can Build Credit in the U.S.
Tuesday | February 4, 2020 | by Akinyi Ochieng
In the United States, a good credit score can help you achieve your personal and professional goals. However, newcomers do not have a credit score when they arrive in the U.S. This can make it difficult to settle into your new life.
For example, you might need to demonstrate that you are reliable with finances before you can rent an apartment. And you might want to open a credit card in order to start financing large expenses during and after your move. Both tasks typically involve your credit score.
In this article, we explain why it is important to have good credit in the U.S. We will also explain how to build credit, so you can improve and maintain your credit score.
Confused? Start Here
Why Do You Need a Good Credit Score?
When you apply for a loan or open a new credit card, financial institutions often check your credit score. A high score means that you have a history of borrowing money and paying it back. Therefore, you would be a good candidate for a new loan or credit card.
However, without a credit score, banks and lenders can’t accurately predict the likelihood that you will repay your debts.
Your credit score can also affect:
- Interest rates. If you are opening a credit card, then you will want the lowest possible interest rate. A low interest rate can dramatically reduce the total amount of money that you will pay back to the lender (on top of the amount that you originally borrowed). If you have a high credit score, then you will qualify for lower interest rates. People who cannot demonstrate their credit history, and those who have bad credit scores, must typically pay higher interest fees. One of the good things about this, however, is that once you establish a credit score—or if your score improves—you can usually renegotiate the original interest rate.
- Insurance premiums. Your credit score can affect your insurance premiums (for example, the amount of money you pay each month to insure your car). If you don’t have an established credit history, an insurance company will consider you more of a risk. But candidates who seem less risky will pay less in premiums. Since your credit history reflects how financially responsible you are, insurance companies believe that it is also a reflection of how responsible you are in other areas of your life (for example, while driving). If you have bad credit, or nonexistent credit, you will likely pay more for your insurance.
- Living arrangements. You might already know that when you apply for a home mortgage, a financial institution will review your credit score. But did you know that landlords can also review your credit history before allowing you to rent a room, apartment, or house? Applicants with low credit scores will be granted lower mortgage amounts—if they can get financial backing at all. Likewise, landlords may turn away applicants with poor or nonexistent credit scores (even if they show proof of income and savings).
As a newcomer in the United States, you should begin establishing a credit history right away. Then, you will not encounter any problems when it comes time to open a bank account, borrow money, or make a big investment. Keep reading to find out how to start building your credit score.
How to Build Credit in the U.S.
If you have just moved to the United States, you will not have any credit history on record. You will have to build it from the very beginning, with a score of “zero.” (Learn more about how credit scores work here.)
At first, it is going to seem like you will have a hard time boosting your scores. But don’t lose faith! You can have a good credit score in just a few years if you make smart choices with your finances.
Here are four steps to get you started:
Transfer your credit score to the U.S.
The United States does not typically accept credit referrals from other countries. Therefore, most newcomers arrive without any credit history attached to their names. That can be particularly frustrating for those who have built a credit history abroad. However, some individuals can transfer parts of their credit history to the U.S.
For example, if you’re from Mexico, India, or Canada, and have a record of on-time payments at home, you can translate aspects of your credit history with a partner like Nova Credit. They can provide qualifying candidates with an equivalency report that shows how your credit would rank in the U.S. Then, they work with companies like American Express, a major credit card lender, and MPOWER Financing, a student loan provider, to help you open accounts based on your equivalency report. Once you establish an account with financial partners like these, using the credit you’ve earned overseas, you can start building credit history in the U.S.
Apply for a credit card.
Even if you were not in the habit of using a credit card to make purchases in your home country, opening a credit card can be a great way to start building a credit score in the U.S. But here’s the tricky thing: When you apply, the first thing a credit card company does is to check your credit score. You’re probably thinking: How can I start building my credit history if I need history first? It’s a puzzle that many newcomers face.
If you’ve never taken out a loan, and if you are not eligible for an equivalency report from an organization like Nova Credit, one option is to apply for a secured card. With a secured card, you begin by making a cash deposit; this will be available to the bank if you stop making payments. The amount you deposit typically represents your credit limit. Alternatively, you might want to open accounts with a few retail stores (which are typically more lenient than credit cards, but will still help you establish your credit). International students might also have extra options, because there are special cards and accounts available to college students and recent graduates.
While most credit card companies automatically send reports to credit bureaus, not all lenders do. If you are opening accounts in order to establish a credit history, you must make sure that the provider will share your account information with Experian, Equifax, and TransUnion. You want all of your on-time payments to go on the record! Additionally, you want to make sure you are not being taken advantage of because you are a newcomer. You especially do not want to wind up harming your credit score by getting into a situation of borrowing more than you can pay off.
Finally, when applying for new cards and programs, be sure that you pay attention to the interest rate (also called the annual percentage rate or APR). You will also want to look at all fees and rewards (such as miles or cash back on purchases), not just the credit limit itself. These details can make a big difference, and the point of these early decisions is to prove that you are responsible.
Become an authorized user.
If you have a trusted friend or relative in the United States, they can add you as an “authorized user” to one of their credit accounts. They will be the primary account holder. That means they are legally responsible for the balance (even though you can now use the card, too). Each time there is an on-time payment to this account, it counts toward your own credit history. But keep in mind, this is a trust exercise for both individuals. Your friend will need to trust you to use their account. But if they don’t stay on top of their payments, your credit score will also suffer.
Try a “credit-builder” loan.
A “credit-builder” loan is different than a traditional loan. First, a bank or credit union will deposit a small loan into a locked savings account. According to the Consumer Financial Protection Bureau, these loans typically range from $300 USD to $1,000 USD. Then, you pay the loan back in small installments over an agreed time period. Typically, the repayment period falls between six months and about two years). At the end of the time period, you will receive access to all the money; plus, you have built some credit history. It’s a low-risk option for the bank but also provides newcomers with a useful opportunity to establish trust.
During the time period where you are paying off the loan, it can still be useful to you. Lenders can request information about your credit-builder loan and consider this fledgling credit history against other factors, like your bank account balance and employment record, to approve you for other, concurrent loans. Therefore, the most important part of opening a credit-builder loan is making on-time payments. These will be reported to major credit bureaus and help you establish a credit history. But they might also be reviewed by other potential lenders. Taking out a very small amount in this way—not to spend it but simply to pay it back—can be a safe way to start building credit.
Good Luck Building Your Credit!
Now you know how to build credit in the United States. Get started as soon as possible, so that you have the strongest possible credit history. Then, smart financial planning and on-time payments will ensure that you enjoy financial security while living in the U.S.
Build Your Credit as an International Student
The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of World Education Services (WES).