As a new immigrant to the United States, you face numerous challenges. Even if you come to the country with a job lined up, you’ll have to adjust to new customs, and possibly a new language (if you aren’t a native English speaker). You’ll have to figure out where to live, and gain an understanding of the US financial system.
Along these lines, you’ll need to learn how credit works. If you want to buy a home or a car, without paying outrageous interest rates, you will need to build a strong FICO credit score. In many states, good credit is a must, if you want to rent a desirable house or apartment.
However, there’s a problem. As a recent immigrant, you enter the country with little to no credit history. How do you go about building strong credit?
By following the steps listed below, you should be able to achieve a 700+ credit score within 12 to 18 months. By doing so, you’ll be able to qualify for strong terms (i.e. low interest rates) on mortgages and auto loans, and you’ll be eligible for most credit cards, and pretty much any apartment rental.
1. Open A Secured Credit Card
If you don’t have much credit history, it is difficult for credit card issuers to offer you a credit card. After all, they aren’t sure whether you’ll pay on time, or carry excess debt.
For this reason, it makes sense to open a secured credit card. With a secured credit card, you provide the credit card company with a deposit, which equals part or all of your spending limit on the card. This removes most risks for the card issuer. As a result, secured credit cards are relatively easy to qualify for.
Despite this, it is important that you use the card wisely. You want to make sure that you avoid spending more than 30% of the card’s limit, ideally below 10%.
This means that if you obtain a secured credit card with a $200 limit, you should avoid spending more than $60 on the card – ideally, less than $20. You also should not spend for the sake of using the card. Rather, make purchases you would have anyways, such as groceries, lunch, or house supplies.
You should pay off the spending for these items in full, by the date when your bill is due. Your on-time payments will be reported to the credit bureaus each month, helping you to steadily build a strong credit score.
Also, since you are paying off the balance on the card in full, you won’t be paying interest. This means that building credit isn’t costing you money.
If you follow this strategy, FICO (the main provider of credit scores in the United States) will be able to generate a score for you within 6 months. Over time, your score will steadily increase.
Who offers the best secured credit cards? We suggest looking at Discover and Capital One. Each card has unique advantages. Discover charges no annual fee (so it won’t cost you money to build credit), and reviews your account starting at the eight month after you opened it, to see whether it makes sense to upgrade you to an unsecured card.
If Discover chooses to upgrade your account, you’ll get back the deposit you provided to Discover, but your credit card account will remain open (with a higher limit). If you’ve always paid on time, and carried low balances, there is a good chance that Discover will upgrade you.
Capital One also offers an excellent secured credit card as well. Like Discover, it carries no annual fee. Capital One also offers plans where you can put lower deposit amounts, and still recieve a higher limit. For example, you might provide Capital One with a deposit of $50, and still recieve a spending limit of $200 or $250.
There is no guarantee that Capital One will allow you to put down a lesser deposit amount – but they often do. Capital One will also review your account after five months, and possibly allow you to enjoy a higher spending limit, without providing an additional deposit.
Whether you choose to work with Capital One or Discover, by making a small purchase each month, and paying off the balance on time, you’ll steadily build credit. Within 12 to 15 months, your secured credit card account should have a large positive impact on your credit score.
Some consumers have chosen to sign up for secured cards with both Capital One and Discover, in the hopes of speeding up their credit building process. While this is not neccessary, it can help you build credit somewhat more quickly.
2. Opening A Credit Builder Account
At the same time when you open a secured credit card, you should also consider opening a credit builder account. How do credit builder accounts work?
Basically, a bank or credit union will set aside money for you, in a savings account – let’s say $600. The account earns interest each month. You make payments towards that $600, over a fixed period of time (let’s say 24 months, i.e. two years). If you pay $600 over 12 months, you would pay $25 each month.
These payments are reported to all three credit bureaus, each month, as a loan. Remember, every on time payment helps you enjoy a strong payment history, allowing you to build a stronger credit score.
It is important to remember that when a bank sets aside money for you, they’ve given up the chance to lend that money out to anyone else, let’s say for a mortgage, or an auto loan. As a result, it makes sense that they’ll want to charge you interest on the money they set aside. Of course, since you earned interest on the savings account, the interest they charge you, is reduced a bit by the interest you’ve already earned.
At the end of the 12 months, you’ll get back the money you paid to the lender, minus interest charged. Typically, if $600 were set aside, you’ll get back around $525. More importantly, you’ve built a year of on-time payments, which boosts your score considerably.
It is also worth keeping in mind that a credit builder account is a different type of credit than a credit card. 10% of your credit score is decided by having a mix of credit, that is, both revolving accounts (i.e. credit cards) as well as loans (installment accounts). This is another reason why opening a credit builder account often makes sense.
Self Inc offers an excellent credit builder product. Your local credit union might also be a good option.
3. Become An Authorized User On A Credit Card (Optional)
Perhaps you have a friend or relative with great credit. This person pays their bills on time, and doesn’t spend too much on their credit cards. They’ve had their credit card open for at least several years.
It might be possible for you to benefit from their good credit, without creating any additional risks for them. How? Your friend or relative can add you as an authorized user to their credit card.
To do this, they have to call the credit card issuer, and inform them that they’d like to have you added as an authorized user. They’ll usually also need to provide your date of birth, address, and possibly your Social Security Number.
After obtaining this information, the credit card issuer will add you as an authorized user. They’ll print a card in your name, and send it to the card holder (the person who added you to the account).
In some cases, you’ll be sent the card directly. In either instance, you can activate and then shred the card, or give it back to your friend or relative. It is not neccessary to use the card, in order to benefit from being an authorized user.
Depending on the card issuer, the credit card will now start reporting to the credit bureaus, and boost your credit score. Not every credit card issuer reports authorized users to credit bureaus. You’ll need to confirm with each credit card issuer, as to what their policies are regarding the reporting of authorized users.
While becoming an authorized user can help, it certainly isn’t required. If you don’t have someone who can add you as an authorized user, don’t worry. If you’ve set up a secured credit card (or two), and a credit builder product like Self Lender, you will build a strong credit score in no time.
The Final Word
Being new to a country can be an overwhelming experience. Fortunately, figuring out your credit, and getting your basic finances in order, doesn’t have to be. Follow the steps above, and you should have a FICO credit score over 700, within 18 months or less. This will allow you to buy a home, car, rent an apartment, or make other purchases, at the best interest rates and terms possible.’
