Build an outstanding credit history from scratch | Live Work Travel USA
search
top

Build an Outstanding Credit History from Scratch

You might have paid off credit in your country already, but once you move to America, this is all in the past. Banks will need you to start over and prove that you’re credit worthy by building a great credit history with an outstanding FICO score. This may take a little while and there are some pitfalls to be aware of during the process. So read on to learn about the science behind credit and the best strategy to build it.

© almagami – Fotolia.com

What influences your credit score?

Your credit score aka. FICO score can range from 300 (poor) to 850 (excellent) and is calculated by 5 factors:
1. Payment History – Make sure to ALWAYS pay at least the minimum amount due each month. To avoid having to pay interest, just pay in full. This applies to everything: credit cards, loans, mortgages, etc. Every missed payment will hurt your credit score big time, so make absolutely sure to pay on time. Sign up for automatic payments to avoid human error on the payments.
2. Amounts Owed – To maximize the positive effect on your credit score you should use your line of credit close to 30% every month, without exceeding this amount.
3. Length of Credit History – Starting out, this is the part that keeps your score lower, but over time you’ll build a consistent history of on-time payments, proving to the credit bureaus that you are a reliable and trustworthy borrower. The average account age is key too, so keep your no fee cards open as long as possible.
4. New Credit – Don’t apply for too many cards at once, no matter how great the incentives are. You don’t want to appear desperate for credit. This will hurt your score.
5. Types or Credit Used – The best way to build good credit is to have 2-3 different types of credit (e.g. Car payment, store credit, bank credit)

How to get started

Secured Credit Card – The easiest way to start building your credit history is to get a secured credit card from the bank you already have a checking account with. You will put down a deposit of $200-300, so you’ll be able to charge the card up to that amount. I have to admit, the fact to give a bank money just to borrow it back doesn’t make a whole lot of sense at first. But the bigger picture here is, that you are building a credit history very easily by using the card, while the bank is at absolutely no financial risk.

AMEX – If you already had an American Express card in your country, you can transfer it to the USA. However, your credit score will not be transferred, so you still start from scratch building credit. The advantage is though, that you get a good credit card with a decent limit right from the beginning and can start building your credit history.

Capital One is offering a “Cash Rewards for Newcomers Credit Card” especially for people new to the U.S.

Your next step

Gas or department store card – Gas stations and stores make it pretty easy to get their credit cards for a very good reason. The major credit card companies charge them a fee whenever a customer paid with Mastercard, Visa or American Express. this fee can be up to 6% of the purchase price and this eats away their margin. That’s why stores are offering their own cards to forego this fee.
Long story short, stores want you to sign up for their card and they sweeten the deal by offering a percentage off your initial purchase plus additional cash back points. It’s easy to get one to further establish a good credit history.

Car loan – If you don’t have enough cash to buy a car you will have to finance it, which is another great way for you to build good credit and prove that you’re a good borrower. Did I already mention to always pay on time? Be very strict about it! Automatic payments help a lot and you don’t have to remember to pay every month.

Additional ways to improve your credit score

Pay your bills – Another way to build good credit over time is to always pay your rent and utility bills like water, electricity, etc. on time and never miss a payment. Every late payment can be reported to the three major credit bureaus (Equifax, TransUnion, Experian) and your credit score goes down.
Same with any kind of bills like TV, phone and internet.

Free credit report

Everybody is entitled to a free credit report from each of the three credit bureaus once a year. Take advantage of it to check that there aren’t any mistakes in your report that could hurt your credit score. There are ways to clean up your report if there are mistakes.
Go to www.annualcreditreport.com to get your free credit reports from all 3 credit bureaus (Equifax, TransUnion, Experian).

Free FICO score

Unlike the free credit report that you get once a year, you usually have to pay to see your FICO score. The only way to get this score for free used to be when you’re inquiring for a loan and have the bank pull it for you to approve your loan. Fortunately things change and now card holders of a Barclay credit card can pull their FICO score for free and as often as they want. It even shows you your FICO history with a chart. I personally have access to my score through my Barclaycard Arrival Plus, which is my most used credit card with the overall best cash back.

Please share this article with other people that are new to the U.S. or struggling with their credit score.

Email_signup_banner

10 Responses to “Build an Outstanding Credit History from Scratch”

  1. Alfred R says:

    My case -

    Had an AMEX GOLD back in Japan, so indeed, it was simple (just a couple of days) to get an AMEX GOLD here in the US. Nice!

    One caveat though, in a normal scenario, one should have a credit score of at least 750 to get a Gold Card from American Express; however, it being a _charge card_ (no debt utilization ratio), there would be much merits to improving your credit score.

    Next, though Im a recent immigrant here to the US, my wife has lived in this country for some years. She has excellent credit – which we used to purchase a car for 0% APR across 5-years. No, she wasnt a Co-Sign to me; rather, as Joint Ownership to the loan. This would entail me a chance to build credit; and my wife a car purchase history (she never bought a brand new car with a loan before).

    Just a side-note, though – even if we could have bought the car in cash, we opted for a loan, so, as you mentioned in your blog – to build credit. And, in spite of my wife having excellent FICO, we also had a 50% down payment to strengthen our application for the zero-percent (as, myself have NO CREDIT score).

    As for the secured card, I just got my California DMV Driver License the other day (been using a temporary paper license the last two months). Now, I can head on to the closest Credit Union, open an account, and get myself a credit card. Yes – Ive heard that Credit Unions are less stringent than banks when handing out cards to new immigrants.

    Onwards – I guess, it is just to wait…

    • Dan says:

      Thanks for sharing, Alfred!

    • David says:

      Thanks Alfred for the very informative post. I am a U.S. citizen who has lived in Japan for 6 years and before I moved away from the States (job related reasons) I made a big mistake and left a lot of credit due to running into some very difficult circumstances.
      To fast forward a few years, I applied for, and got, a Japanese AMEX Gold card in 2011 and have been paying the balance in full each month (about $1000/month for past two years).
      My Japanese wife and I are planning on relocating back to the U.S. in December of next year (’14, 7 years after moving to Japan) and I (we) am hoping:
      1)to somehow be able to use my good credit record(cellphones, Amex, rent, etc.) here in Japan to show that I am worthy of receiving a loan if need be and,
      2)transfer my Japanese Amex over to a U.S. Amex and show proof of responsible use for 3 years.

      Do to my responsible usage here in Japan I was even able to get a Amex Gold card for my wife who had never had a credit card or credit rating.
      I am hoping that things will just sort of fall off my credit report by or around the time I get back to the States, since it will have been 7 years since I last lived in the U.S.
      Anyway, I just wanted to say thank you for your helpful post!
      Sincerely,
      David

      • Dan says:

        If these things don’t fall off your credit report automatically after 7 years, you can also contact each credit bureau and ask them to take it off.

  2. Alfred R says:

    I re-read my post…

    Just an errata: though AMEX Gold require an Excellent FICO to get; once you get it, there is _NOT_ much benefit to your Credit Score. This is because it is a Charge Card, hence, no debt utilization ratio.

    • Dan says:

      The AMEX Gold also comes with a hefty annual fee of $175. The perks of 3x points on air fares and 2x on gas and US supermarkets are good though. But is it worth the annual fee?

  3. Craig says:

    Payment history makes up a total of 35% of our credit scores that’s why it is so important to pay your dues on time. One late payment can cause a drop in your score. I found the breakdown of the scores here http://www.myfreecreditreportx.com/is-my-credit-score-good

    • Dan says:

      Thanks Craig. If you have a credit card from Barclay’s, like I do, you can now check your FICO score for free through your Barclay’s account. It’s a new feature from them, which is pretty awesome. I can pull my score as often as I want without having to pay a fee as long as I have their credit card.

  4. Cheryl S. says:

    Dan, thank-you for your blog, you share so much useful information.

    I am a Canadian ex-pat living in Florida. Like many others, I have experienced some of the woes of not having an American credit history. While you provide many tips on how to establish a credit history, I am writing to warn others of a point that you mention only briefly: New comers should resist the temptation of applying for store credit card offers until a credit history has been established.

    When you first arrive in the USA, you must purchase items to set up your new home. You are anxious to get started, to set roots, and to some great deals. Every department store you shop at offers you their credit card and, if approved, you will get significant discount on your purchase that day. These offers are tempting but the new ex-pat must resist. Each cashier counter application results in a credit inquiry. Too many credit inquires will lower your credit score.

    Newcomers must avoid applying for too many (or any) cards until a credit history has been established. I did not know this nor did any of my ex-pat friends. One of my friends thought it would be prudent “to keep trying” and applied at several stores. This caused their credit score to stay low for a long period of time. Newcomers must remember that each inquiry is kept on record for two years and too many inquiries in a twelve-month period will lower your credit score. I wish I had known this.

    • Dan says:

      Thanks Cheryl, very good points!
      I agree that these store credit card offers can be very tempting. Getting one of these cards should not be a problem, but as a new expat I would rather start with a secured credit card and then after a little while get one of the good ones with great rewards, like the Barclay Arrival (annual fee!), Chase Freedom (no fee) or Discover (no fee).
      I would advise against not getting any card, because you’ll miss out on a lot of rewards for everyday purchases. That was a mistake I made because I was in my German mindset, that I do not need credit because I have enough savings. That’s why we kept paying cash and with debit card. Missed out on a lot of cashback this way.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

top