Seeing how building a credit score is one of the biggest hurdles for an immigrant to tackle, and every now and then you see a topic pop up with a question about things like credit cards, buying a car and so on, I thought it would be a good idea to have a single topic to gather all tips and tricks in a single thread.
In time, maybe we can incorporate this info into one of VJ's Guides...
What is Credit Score
The US Credit Score is a number between 300 and 850, which reflects your ability to handle credit. The official score is often referred to as FICO (Fair, Isaac & Company)
There are 5 items that contribute to your score, each with a different weight:
Payment History (35%): Any history of bankruptcy, liens, judgments, settlements, charge offs, repossessions, foreclosures, and late payments drops your score.
Revolving Debt (30%): The amount borrowed versus available credit. Think Credit Cards.
Length of Credit History (15%): Both the average time of accounts, as well as the age of the oldest account. These must be ACTIVE accounts.
Types of Credit (10%): installment, revolving, consumer finance, mortgage. If you handle more than 1 type of credit, this is good.
Inquiries and New Debt (10%): When making an inquiry for credit, such as credit card applications, shopping for a loan etc, your rating goes down.
Why is this good or bad as a new immigrant
As an immigrant you do not have a history in the US. This means you DO NOT HAVE a US credit rating when you arrive.
The positive thing is that you also do not have any BAD payment history.
The bad thing is, credit is a catch-22 problem in the US: You can't get credit without a good credit score, and you can't get a good credit score without having and using credit.
Any cards, accounts or history you have or had abroad do not count. (One known exception, see below)
What credit score ranges are there
Excellent credit score: 720 and Up
Good credit score: 680 to 719
Average credit score: 620 to 679
Poor credit score: 580 to 619
Bad credit score: 500 to 579
Miserable credit score: Less than 500
How to get credit so you have items reporting into your credit score
A lot depends on your personal situation. Are you married, employed, do you have cash to open an account, and so on.
Typically, you will need to find a bank or credit union first, so ask around.
Once you have found a suitable financial institution, ask for a "Secured Credit Card". This is a card with a certain spending limit, which amount you secure through the financial institution by depositing the cash equivalent on a locked account.
You can then use the assigned credit, and after the first month's statement is due, you will have items reporting into your credit score. You now have payment history, length of credit and revolving debt.
Usually, your bank will replace the secured credit card with a regular credit card, increasing the limit on the card. Expect this after a few months, if you pay your statements on time.
People coming in through a work visa can often get a company credit card, which makes life a lot easier!
If your spouse has a good credit rating, the financial institution might also allow him/her to co-sign the credit card application. Check with the financial institution on the requirements they have. In theory any person (in the US) with good credit can co-sign, so a family friend, parents etc are fine too.
How to get from decent to excellent credit
OK, now that we have some things reporting into our credit score, how can we boost that score up?
1. The number one rule: PAY EVERYTHING ON TIME, IN FULL
2. Specifically to credit cards, the use of credit is important, more specifically, how much do you charge to your card:
Per account, avoid exceeding 33% of assigned credit.
Some people say it's best to have a utilization of 12-20% (Some say between 1 and 20%)
The utilization is based on the amount due on the reporting date. If you buy a 900$ television on a 1000$ credit, but deposit 700$ before the reporting date, your utilization is only 200$, or 20% (Can anyone confirm?)
Do not leave credit cards unused (When not using credit, this hurts your score). If you have a 500$ secured card, you could for instance use it to put fuel in your car every week or so.
Do not close old credit cards, this hurts your account age!
3. Diversify. Get at least one credit card and one installment loan. You can get a secured installment loan through your financial institution. If you want to buy a TV for 1000$, but that 1000$ in a secured account at the bank, and have them give you a loan over 12 months against that deposit.
Another option, typically when buying a car, is to get a car from a dealer who gives credit to "anyone". But ALWAYS ask if they report to the credit agencies (CRAs). Then pay the remainder of the loan after at least SIX months. The intrest rate will be ridiculous (over 20% in most cases).
According to Equifax, having at least 4 (different) lines of credit are required to get a really good score (Credit Card, Mortgage, Car Payment, Student Loans, Personal Loans, Home Equity Loan for Credit, ...)
My credit union actually suggested the following:
a) Get a "personal secured loan" to buy a car. (basically: Put the money you would pay as a cash downpayment on a car, into a secured loan for yourself)
b) After 90d of employment, you qualify for a "first time borrower" loan. Bring in the title to the car, and you can use the title to borrow against. You'd get a mediocre intrest rate (C-level credit).
This would give you 3 lines of credit after about 4 months, which is pretty good !
Age of Credit Accounts
Even if you have a decent credit score after a few months, when the time comes you want to buy your first car, you might get rejected quite a bit on your loan, due to "no sufficient credit history". Although the average age of accounts only counts for 15% of the credit score algorithm, financial institutions will count this as one of the major factors for credit decisions. The solution is to get a large downpayment, and preferably work with the financial institution directly, not through a dealer.
Credit Reporting Agencies
There are 3 major CRAs in the US:
They all have minor differences in how they calculate your credit score. By law, they are (each) required to give you one free credit report per year.
What can affect your score negatively?
Wondering when judgments and bankruptcies will no longer appear on your credit reports? Check the dates on records in your credit report. Generally, here's how long judgments and bankruptcies remain on a credit report:
Generally, Chapter 7, 11 and 13 bankruptcies appear as public record items on your credit report for up to 10 years after filing. Chapter 13 bankruptcy records are sometimes taken off sooner, 7 years after filing, depending on the credit reporting company’s policy. When you receive an Order of Discharge in bankruptcy, your creditors should mark those accounts that were discharged as "Included in Bankruptcy" and they will stay on your report for up to 7 years.
Generally, if a delinquent account is charged-off, the charge-off record appears on your credit report for up to 7 years.
Generally, negative or derogatory information about delinquent accounts remain on your credit reports for up to 7 years. Positive closed accounts (without late payments or other delinquencies) may appear for longer than 7 years.
Generally, accounts sent to collections will be listed on your credit report for up to 7 years, beginning 181 days from the most recent delinquent period before the collection activity. A collection account’s status should change to "paid collection" once you've paid off the entire amount. If you settle with the collection agency for less, your credit report may list the account as "settled for less than full balance."
When a creditor or lender checks your credit in connection with an application, you'll usually see a "hard inquiry" on your credit report. Generally, these stay on your report for as long as two years, and may lower your credit score slightly. When a creditor reviews the credit report of an existing customer, or when you access your own data online, a "soft inquiry" typically shows up on your credit report. Soft inquiries don't lower your credit score or appear to businesses checking your credit.
Generally, most court judgments, including small claims, civil and child support, stay on your credit reports for up to 7 years from the date they were filed.
Generally, if you make a payment late, the delinquency could appear on your credit report for up to 7 years.
Under federal law, city, county, state and federal tax liens could stay on your report indefinitely. Generally, after the lien is paid, the record of it stays on your credit reports for up to 7 years from the payment date.
One of the most important of these are the inquiries. If you want to get store credit or a new credit card, DO NOT JUST APPLY for one. Every time you apply for credit, your score will drop a few points, and the inquiry itself (Often referred to as "hard inquiry) stays on your report. Lenders who see systematic hard inquiries on a report see this as negative.
However, when shopping for a car (and thus car loans), all hard inquiries within 14 days are reported as one. When buying a house and a mortgage, they are grouped into one for 30 days.
VISA and MasterCard are basically payment PLATFORMS, where local financial institutions issue the credit through the platform. Your credit history and account reside with that financial institution.
American Express (AMEX) however, issues the credit itself (Sometimes through local companies, but the credit file is shared with Amex --> This appears NOT to be the case: If cards in your country are not issued by American Express directly (Global Network Cards), they cannot be transferred.).
If you have an Amex abroad, and have had it for more than 12 months, you can (in most cases) request a US Amex card to replace your foreign card. The advantage is, with a good foreign history, chances of approval are very high, plus, the age of your account goes back to the first issuance of your Amex card abroad !
Transferring Funds to the USA:
Another point to remember is that transferring your foreign money to your new US account (for instance, to get your secured loan or secured credit card) can be a costly affair. Banks have 2 areas to make money off you:
Transfer fee: Usually a flat fee or a fixed percentage. This is the fee that is generally quite visible. Exchange Rate: The exchange rate your bank will use is quite different from the real exchange rate on the market. For example, the exchange rate between the EURO and the US DOLLAR might be 1.330 on the market, but your bank might only offer you 1.290. That is a 3% difference you might not see !
After doing some research, I settled on TransferWise. (https://transferwise.com/u/b6f15). This seems to be the best platform so far for people in Europe (incl. the UK) to send money to the US. (Or from UK -> EU and vice versa).
It takes a few days longer than most bank transfers, but other than that, I have found it faultless and easy to use. The people behind TransferWise are those that built Skype.
Little disclaimer: The URL provided (https://transferwise.com/u/b6f15) is linked to my account and will allow me to accumulate friend referral benefits.
There are other platforms that outperform high-street banks and Paypal, please feel free to comment below to add your experiences (and from where to where you sent the money). I would find it useful to add information on how to send money from Non-EU countries, and also how to send money to the foreign spouse / fiancee.