How to Start Building Good Credit as An Immigrant
The American financial system is large and complicated. The American immigration system is similarly large and complicated, and many people who navigate it need some help getting their finances in order.
If you’ve recently immigrated to the United States, you might want to start looking into loans and credit cards.
There’s one problem: you won’t have any kind of credit score.
Without a credit score, lenders will be hesitant to offer you a loan.
In order to qualify for the best loans and credit cards, you’ll need to build your credit score now.
Learn how to get started.
What Do You Need to Apply for Credit?
Before getting started, make sure that you have all of the information that you need to start applying for credit.
In order to be able to apply for credit, you’ll need a few basic things.
First, you should make sure you have a U.S. Tax ID number.
Without that number, you won’t be able to apply.
You’ll also need a mailing address that lenders can use to communicate with you and send you any cards you apply for.
You’ll also need to provide the same information that anyone else provides when they apply for credit.
Lenders want to know that you can pay a loan back. You’ll have to provide information including:
- Proof of employment
- Proof of identity
- Your date of birth
- Annual income
- Whether you own or rent your home
- Your total financial assets
- Your country of citizenship
Lenders will use this information to confirm your identity and make a lending decision.
The more information you can provide, the fewer questions the lender will have. That can only improve your chances of getting a loan.
Ways to Start Building Credit
There are a few strategies you can use to start building your credit.
Secured credit cards
One of the best ways to start building credit as an immigrant is a secured credit card.
A secured credit card functions just like a normal credit card. You get a card that you can use to make payments at stores and get a bill every month. You pay off the balance each month when you get the bill.
The only difference between a normal card and a secured card is that you have to provide a security deposit to get a secured credit card.
For example, if you get a secured credit card with a $300 limit, you have to provide a $300 security deposit.
This is great for lenders because it means they take on effectively no risk by lending money to you. That means it’s incredibly easy to get approved, so long as you can provide the deposit.
Once you have a secured credit card, lenders will report your card activity to credit bureaus just as if it were a standard credit card. After you’ve had the card for a few months to a year, you should have enough of a history to qualify for unsecured cards.
Some secured credit cards charge annual fees, but there are plenty of fee-free secured credit cards out there. Some even offer cash back, letting you take advantage of rewards while you build your credit.
Still, the security deposit isn’t a true cost because you can get the deposit back if you use the card properly. So long as you make your payment on-time, your credit will improve.
Most secured card providers will regularly review your account.
If you’re in good standing and have good credit, you can be upgraded to an unsecured credit card. When that happens, your security deposit will be returned to you.
Credit builder loans
Credit builder loans are another way to build your credit score.
Usually, these loans are offered by local banks and credit unions. They are for small amounts, often no larger than a few thousand dollars.
Credit builder loans can be either secured or unsecured.
When you receive a credit builder loan you can either use the money or simply keep it in a savings account at the lending bank. Each month, make your payment on the loan and your score will increase.
Credit builder loans tend to have terms of about one year and low interest rates.
This makes them relatively inexpensive, but you do still pay interest. If you can get a secured credit card that doesn’t charge a fee, you might be better offer using that to build credit.
Work with your current lenders
Some international lenders are willing to help you transition to a new country when you move.
For example, American Express is willing to offer a credit card in your new country based on how well you used your American Express cards in your old country. This can be a good way to get started with building credit.
If you worked with a lender in your older country and that lender also operates in the U.S., contact them to see if you can work out a deal.
How Credit Scores Work
Your credit score is a numerical representation of your trustworthiness as a borrower.
Credit rating agencies keep track of how you interact with debt and use that information to generate your credit score.
Your score can range from 300 to 850, with 850 being the best score available. The higher your credit score, the better your chances of getting a loan.
Your credit score is determined by five factors:
- Payment history
- Amount owed
- Length of credit history
- New credit
- Types of credit used
Your payment history is the most important part of your credit score. Alone, it makes up more than one-third of your score.
Quite simply, your payment history tracks how good you are at making your payments on-time. Each on-time payment will increase your score.
Each late or missed payment will reduce your score. Even one late or missed payment can undo the effects of years of timely payments, causing a huge drop in credit score.
Making sure you make your payments each month is incredibly important. Signing up for automatic payments is a good way to avoid mistakes.
The amount you owe also impacts your credit score. There are two things related to how much you owe that affects your credit score.
The first is the total amount of debt you have. The more you owe, the lower your score will be. Paying down existing debts will give your score a boost.
The other thing to pay attention to is your credit utilization. This is the ratio of your total debt to the sum of your credit cards’ credit limits.
If you’re maxing out your cards, that doesn’t look good and your credit score will go down. If you’re using just a small percentage of your limit, your score will improve.
Length of credit history
Lenders want to see people who are experienced with using credit.
If you’ve had access to credit for a long time and have a long credit history, that will be good for your score.
The longer that the credit bureaus have had to gather info on you, the more accurately they can assess your creditworthiness.
Lenders also want to see long-term lending relationships. That’s why they look at the average age of your credit accounts.
If you tend to apply for a few cards and keep them for a long time, that’s good for your score. If your average credit card or loan account is just a few months old, that will drag down your score.
Each time you apply for a new loan, the credit bureau will take note of this fact. Lenders will also see any recently opened loans when they look at your credit report.
Someone applying for a lot of loans in a short period of time is a red flag for many lenders.
It indicates that they might be in financial trouble, so lenders will be less likely to offer you a loan if you make too many applications too quickly.
Types of credit used
There are many different types of credit out there: personal loans, credit cards, student loans, mortgages, and more.
Working with one type of loan can be very different than working with other types of debt.
Lenders want to know that you can handle multiple types of debt, so having a mixture of account types on your credit report will improve your credit score.
Immigrants to the United States have a difficult enough time getting used to living in a new country.
Building their credit score just adds more stress to the process.
Follow these tips and you can get on the path to having good credit.