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