In 2012, President Obama announced an executive order, creating the Deferred Action for Childhood Arrivals (DACA) program. This executive order allows individuals (known as Dreamers), who were brought to the United States as children (without legal permission), to recieve relief from deportation, and obtain work permits.
DACA has requirements around age, criminal history, and how old you were when you immigrated to the United States. The program requires applicants to have either completed high school (or obtained a GED). If you were accepted into the DACA program, you’re required to renew your DACA status periodically.
In September 2017, President Trump announced that he was ending the DACA program, and offered Congress a 6 month window within which to act to save the program. Congress failed to do so, and DACA was scheduled to formally expire in March 2018.
However, those who were already approved to participate in DACA, currently retain their status, thanks to court rulings. The US Supreme Court will decide the ultimate fate of DACA in 2020.
As a Dreamer, you’re eligible to apply for a Social Security Number, and you’re authorized to work. Building strong credit is an important part of enjoying a secure financial future. Good credit makes it easier to rent a place to live, purchase a car or a home, start a business, and to enjoy peace of mind.
Many of the steps to build credit as a Dreamer, are the same as for those who enjoy citizen or permanent resident status. However, there are some differences, particularly when it comes to purchasing a home. Below, we’ve discussed how you can build credit as a Dreamer, and some unique things to consider if you’re looking to buy a home.
Open A Secured Credit Card
In order to build good credit, it is first important that you use credit. The problem is, if you haven’t used credit before, it is often difficult to qualify for credit cards and loans.
How do we resolve this? Fortunately, there’s a simple tool to overcome this challenge: Secured credit cards.
A secured credit card is quite simple. You provide the credit card issuer with a deposit, which they hold on to, for as long as the card is open. That deposit equals part or all of your spending limit on the card.
So, if you provided a deposit of $200, that often means you can’t spend more than $200 on the card. Sometimes, a card issuer will offer a slightly higher limit (say $300), for the $200 deposit.
It isn’t enough to have the card open – you need to use it, at least occasionally. You also must pay the card off on time, every month. To understand how to use your credit card, it’s important to understand a bit about how credit scoring works.
Your FICO credit score (used by around 90% of lenders) is made of five factors. The most important of these factors (making up 35% of your FICO score), is your payment history – that is, whether you pay your credit accounts on time. Payment history also considers negative credit items like bankrutpcies, auto repossessions, home foreclosures, and charged off and collections accounts (when you stop paying on an account, for months on end).
The second most important factor is the amount of debt you carry. This counts for 30% of your credit score. Credit card spending plays a particularly large role in determining your “debt score”, since all of your credit card balances are reported to each of the credit bureaus, each month.
To understand how to use your credit card, there are two important dates that you need to consider: Your credit card’s due date, and the statement date. Your due date is when your payment on the card is due – that is, you have to pay for previous spending on the card.
Credit card issuers report balances to credit bureaus, around the time, or shortly after, your credit card statement for that month is closed. So, let’s say that your statement’s closing date is May 9th. Your balance as of somewhere from May 10th, to perhaps May 12th, is what will be reported to credit bureaus.
You want to make sure that your balance, as reported to credit bureaus, is below 30% of the credit card limit – even better, below 10%. So, if you have a secured card, with a limit of $200, you should make sure that your balance as of the statement closing date is less than $60 – or if you can, less than $20. This means that your secured card should only be used for small purchases.
A lot of folks wonder whether having a secured credit card means that they have to spend extra money to build credit? Not at all.
In your daily life, you make purchases – for lunch, groceries, gas and more. For a few of these transactions, rather than paying in cash or a debit card, you should use your secured credit card – and then, pay off the balance.
Discover and Capital One offer some of the best options for secured credit cards. Neither card has any annual (yearly) fee. Remember, if you pay your balance in full each month, you also won’t be paying interest. This basically means you’ll be able to build credit without spending additional money.
Discover and Capital One each offer unique advantages. Discover automatically reviews your account after about 8 months, to decide whether you should be upgraded to an unsecured card.
If you’ve always paid on time, they will generally agree to the upgrade. At this point, you’ll recieve your deposit back. You’ll be able to use your card with a higher spending limit, and no deposit.
Capital One also allows you to upgrade your card (usually after 9 to 12 months). However, this usually involves opening a new account, and possibly closing the old one. Capital One, however, is more flexible than Discover, in allowing you to have a larger limit than your deposit, when opening a secured card. You can often (not always) obtain a $200 limit with a deposit of just $50.
Open A Credit Builder Account
Besides having a secured card, you should also consider opening a credit builder installment account. How do these accounts work? \
Basically, you’ll sign up with a lender, who will set aside money for you, in a savings account. You won’t have access to the money, for 12 or 24 months (your choice). For this example, let’s say they set aside $300, with a 12 month term.
During those 12 months, you’ll make payments of $25 per month to the lender, until you’ve paid off the $300 which was set aside. Each month, these payments will be reported to the three major credit bureaus, as a loan. Remember, you don’t have any access to the $300, during this time.
At the end of the 12 months, you’ll get back the money you set aside (which earned some interest), minus interest charged by the lender. Why did they charge interest?
Remember, the lender deposited that money in a savings account for you, earning very little interest. Rather than setting aside the money for you, they could have lent it out to borrowers, to purchase a home, a car, or fund a business.
Doing any of those things would have allowed the lender to earn a higher interest rate, and thus make more money. Therefore, it’s not surprising that the lender charges interest.
A credit builder account helps your score in several different ways. First, it adds another positive account, with on time payment history, to your credit reports. Secondly, it provides you with a mix of credit.
Remember when we referred to the five factors that determine your credit score? The first two factors are your payment history, and how much debt you have.
The third factor is your mix of credit. This refers to having different types of credit accounts, such as credit cards, mortgages, and installment loans (like this account). Adding a credit builder account improves your mix of credit, which further boosts your credit score.
Self Lender offers excellent options for credit builder accounts. Your local credit union might also have a package which makes sense.
Be Added As An Authorized User On A Credit Card
One of the best ways to build stronger credit, is to make use of other people’s good credit. You can do this by becoming an authorized user.
Please note that if you aren’t able to follow this step, as long as you opened a secured credit card, and a credit builder account, you’ll be able to build strong credit, in less than one year. Therefore, being an authorized user, while useful, is not mandatory for enjoying good credit.
As an authorized user, your name is added to a credit card, by the person in whose name the card was issued. The account will then appear on your credit reports, and helps your credit score.
There are several ways in which being an authorized user can benefit you. First, if the primary card holder consistently pays the account on time, their on-time payments will appear on your credit reports.
Also, if they keep their spending on the card low (below 30%, even better below 10%), then the debt portion of your credit score will benefit. Lastly, if you’re new to credit, and the account has been open for a few years, then having an account with some age, is very beneficial to your credit.
How do you go about finding an authorized user? The first place to look is your immediate circle. Perhaps you have a friend, family member, or colleague, whom you would consider responsible?
You should approach this person, and explain that you’re looking to build credit. Mention that you’re wondering whether they would be willing to add you as an authorized user to their credit card.
Understandably, even a close friend or relative will have questions. Perhaps most important to them, is the question of responsibility. For them to trust you with their credit, i.e. their good name, is a major commitment.
Fortunately, you can make this completely risk free. If you’re added as an authorized user, the person who added you does not actually have to give you a physical copy of the card, or access to the account. Simply by adding your name and personal information to the account, the account will appear on your credit reports, and help improve your credit score.
You might have heard about the popular but questionable practice of selling tradelines. Basically, this refers to having someone with a positive credit card account (i.e. one with a strong payment history and low debt), sell you authorized user status.
You should avoid tradelines. They often don’t deliver the benefits promised, and there are serious questions as to whether they are in fact legal. Instead, stick with finding a friend, family member or colleague who can add you to their card.
A Word About Mortgages
If you’re building credit with the hopes of buying a home, it is important that you understand a bit about how mortgage lending works, and the restrictions currently applied to Dreamers seeking to purchase a home. The Federal Housing Administration (FHA) is a government agency, which helps folks who can only afford limited down payments (as little as 3.5% of the purchase price of the home), to obtain a mortgage.
The FHA does this by having buyers purchase mortgage insurance, while the FHA also guarantees loans, in the event of a default by the borrower. FHA programs also allow mortgage credit scores as low as 580. For these reasons, FHA has been a popular program with first-time homebuyers.
Unfortunately, at this time, Dreamers don’t have access to the FHA program. However, there are lenders who offer conventional mortgage loans to Dreamers. These loans usually demand a FICO mortgage score of at least 620. Of course, the higher your credit score, the lower the interest rate you’ll pay on the loan.
Most conventional lenders also require a down payment of between 5% to 20%. If you purchase with a down payment below 20%, you’ll have to also buy private mortgage insurance. Your private mortgage insurance rate is also determined in large part by your FICO score.
It is unfortunate not to have access to the FHA program, which has historically been very popular with first-time homebuyers. However, if you follow the steps detailed above, you’ll be able to build a mortgage FICO score over 620, without too much trouble.
What’s more, with consistent effort, you should be able to save enough for a down payment for a home. Consider signing up for Mint.com.
Mint is a free app, which allows you to link all of your financial accounts (including your bank, credit cards and more), and monitor your savings, spending and more. Knowing how much you’re spending and saving makes it easier to reach your goals.
The Final Word
Building credit as a Dreamer is not much different from doing so as a US citizen. Secured credit cards, credit builder accounts, and being an authorized user, are all effective strategies to enjoy the strongest credit score possible. While access to mortgages is somewhat more limited, you still enjoy solid options, and purchasing a house is very much possible.
Good credit offers peace of mind and solid financial options. Get to work on building your credit today.
