For new arrivals to the United States, it is crucial to understand the importance of establishing credit and take active steps to build a good credit history as soon as you arrive. Having bad, or no credit at all, makes everything cost more for you - and you don’t want that! The concept of “credit history” (a record over a period of time of a person’s repayments to a borrowed debt, like a loan or credit card purchase) can be confusing, frustrating, and counterintuitive to newcomers to the U.S., since many countries do not track credit history. In the U.S., banks, brokers, and landlords use something called a credit score to determine your trustworthiness to repay a loan, make mortgage payments, or make rent. In the United States, credit history plays a large role in determining your credit score, and having no credit history can be just as bad as having a bad credit history. An expat may arrive with spotless records of mortgage payments and very little debt in their home country, but they start off in the U.S. with a completely blank slate credit wise.
Here are some of the possible consequences of having no U.S. credit:
Difficulty renting an apartment or buying a home
Difficulty buying a car (higher interest rates or denial for a loan)
Extra deposits on utilities, U.S. cell phone contracts, and higher security deposits on rental homes
Higher interest rates on home and auto loans
Difficulty getting a credit card (missing out on credit card perks such as free airline miles, cash rewards etc.)
You get the picture. Having no U.S. credit score will cost you thousands of dollars in extra fees and higher interest rates until you establish yourself as “worthy” of a loan. You can see why it is so important to act fast to establish a good credit score in the U.S.
Your credit history is a history of payments to a lender or credit card and shows whether those payments were on time, missed, or late. Three major credit bureaus in the U.S. track your credit history: Experian, Equifax, and Transunion. These bureaus compile individual credit histories and calculate a credit score based on an algorithm that mostly has to do with these three things: 1) how long an individual has had an open credit account; 2) debt to income ratio; and 3) payment history on credit debt. People who have lived in the U.S. for many years and who have several credit cards or loans are establishing a credit history for better or worse each year, and their score reflects how consistently they make payments on debt.
What is a “good" credit score?
Excellent Credit: 750+
Good Credit: 700-749
Fair Credit: 650-699
Poor Credit: 600-649
Bad Credit: below 600
A credit score (also called a FICO score) ranges between 300 and 850. Over 700 indicates good credit management but for the very best interest rates on loans and higher credit limits a good goal is a credit score of 760 or above.
So, how do you get U.S. credit when some banks won’t even give you a credit card without a good credit score or credit history? Here are some key steps every expat or transferee should do or consider doing in order to establish credit as fast as possible.
1. Apply for your social security number as soon as possible.
Your social security number is used by credit reporting agencies to track your payment history and you cannot build a U.S. credit history without it. It is crucial to give your bank your social security number as soon as you receive it in the mail and apply for a credit card as soon as possible.
2. Choose an expat-friendly bank to open your U.S. bank account and apply for a credit card or secured credit card right away.
There are two banks in the San Francisco Bay Area that work with newcomers to actively help you build your U.S. credit history right away. While other banks will require proof of a U.S. address, a social security number, and other things a new resident does not yet have before even opening a basic bank account, the following banks allow you to open an account with only your visa, passport, and one other form of Identification.
Bank of the West offers extremely personalized service, does not require a social security number, or residence address before opening your account, and will issue you an Expat/U.S. newcomer credit card once you do get a social security number. Bank of the West is a very expat-friendly bank.
Bank of America also will work with expats without prior history. Walk into any branch (there are many!) and ask for an experienced agent to open an account with your visa/passport and one other proof of ID. They do not guarantee an unsecured credit card for expats but they have a secured credit card option and have an application process that takes your employment offer letter into consideration. B of A may have a partnership with your company that helps you secure a credit card quickly. Be sure to ask about this!
3. If you plan to buy a car, take out a small car loan - and pay it off on time.
This is one of the fastest ways to establish U.S. credit history and a good credit score. I paid for most of my car upfront but have a small car loan payment automatically withdrawn from my bank account each month and my credit score has gone up dramatically. Taking a small loan out is great for building your credit even if you don’t need the loan to pay for your car, since showing you can pay the loan is the name of the game. You can secure a loan from car dealers or credit unions with no credit history but be sure to shop around for the best interest rates. If you pay your loan payment on time every month, this small loan will save you thousands of dollars in the long run by helping you to get a good mortgage rate if you decide to buy a house. Good credit score = lower interest rate. Bad score = higher interest rate.
4. Lastly, if your plan is to make a big purchase (like a house) and you need credit fast to secure a good loan rate, consider taking out a credit builder loan from your bank.
These lesser known loans are often offered by smaller financial institutions, such as credit unions and community banks, and are basically designed to help you improve your credit score quickly. You will be approved for a loan even without credit, but you won’t see the money until you pay it off in full. The money you borrow is deposited in an inaccessible savings account until you pay off the loan in full. In return, the financial institution will send a good report to the credit bureaus after you pay off the loan, helping you establish credit. Because you will be paying interest, you are in effect paying a little now for a bigger payoff later in the form of a better lending rate on another loan down the road.
How long does it take to establish a basic U.S. credit history and score?
After you apply for a credit card or loan and make payments for 6 months, you should have the beginnings of a good credit history in the U.S.
Once you have your U.S. credit card, try to think of it as an ATM card and pay the balance off completely before the due date each month. Set a phone or calendar reminder to pay each month before the due date to avoid any interest charges on your purchases and demonstrate to credit bureaus your on-time payment history to increase your score.
If you must have debt on your credit card, keep it as low as possible, below 30 percent of your credit limit.
Do not open up too many credit card accounts at once, just open a few and pay off the minimum balance or entire balance each month to get the best credit score. Your credit score is based on a number of factors including account average age of your accounts. If you open up too many new accounts, the average age is lowered and so is your score.
I know it’s complicated, but if you follow these steps, you should be on your way to good U.S. credit in six months. To find your credit score you can get your free credit report from www.creditkarma.com and see how you are doing in building your credit.
Until next time,
Move Bay Area