As a new immigrant to the US, establishing a credit history allows banks to ‘take a chance’ on you. When you move to the US, your record doesn’t follow you. You’ll have to rebuild your credit from scratch. Not to worry though – we’ve outlined some simple strategies for immigrants to establish a credit history.
Why Should an Immigrant Build a Credit Score
A credit score is important for a number of reasons. Of course, the primary reason a credit score is used is to evaluate how much credit to extend to you and at what interest rate. A better credit score means more credit at a lower interest rate.
As a new immigrant, you will likely be encountering several major expenses establishing yourself in the United States. If you haven’t already, you’ll likely need to buy a car, and you may be wanting to buy a house in the near future. Unless you have significant cash resources, you’ll likely need a loan to afford these. Having a good credit score could be the difference between qualifying for a mortgage and not. And a great credit score can save you thousands of dollars in interest over the life of the mortgage.
Even if you have no interest in getting a loan, your credit score still matters. Landlords, cell phone companies and utility companies use your credit score to determine what kind of security deposits to require and what kind of payment plans to extend to you. Insurance companies use aspects of the score to determine how risky of a client you are.
How Your Immigrant Status Is Relevant to Your Credit
You may be concerned that your immigrant status will keep you from getting credit. This is a valid concern. While your immigrant status is not listed on your credit report, lenders are still allowed to consider your immigration status at their discretion to decide whether you will stay in the country long enough to repay your debts. Whether a lender will actually check this varies from lender to lender. Some lenders simply use your credit score, while others do more detailed examinations of borrowers. However, if you can demonstrate that you intend to stay in the United States for a longer period of time, this will be less of an issue.
First, Be Sure to Have a Social Security Number
If you already have a job in the United States, you likely already have your social security number. If not, apply for one. Your SSN is your primary identification number and is used throughout the financial and government world. When it comes to your credit report, having a SSN is the best way to ensure that lenders are able to look up your credit report and record your on-time payments to your credit report.
Maintain Consistency When Building Your Credit Score
Your credit score is a balance of good and bad factors. The more good records relative to the bad, the better your credit score. However, to have an excellent credit score, it is important to keep your report free of negative information. Once you have a ding on your report, it can stay there for 7-10 years.
You may be tempted to take on a lot of debt to help establish your credit, or simply to finance spending. Be careful that you don’t get in over your head- to the point that you start making late payments or defaulting entirely on this debt. Your payment history is the single most important factor in your credit score and missed payments will establish a bad score in a hurry- especially as an immigrant with no prior good history to balance out your mistakes. Instead, start with small loans or lines of credits, only adding new credit when you are sure that you can handle it.
Credit Cards Can Be a Low Cost Way to Build a Credit Score
You need to take out loans or credit to establish your credit score. However, many loans that are available for people with no credit come with high interest rates since the lenders consider you a high-risk borrower. This can end up costing you dearly over the life of the loan. Credit cards, however, allow you to avoid interest entirely if you pay your balance in full each month. There are also several cards with low or no annual fees.
Credit cards help you build your credit because each payment is a good mark on your credit report. By keeping the account active and open, you begin increasing your average account age, which is another factor in your credit score.
Qualifying For a Credit Card As a Foreign Student
If you immigrated as a student, you’ll likely have several credit card options that are available to students. To help students build credit, lenders offer cards with low limits, and often with student related perks on top. If these are available, these may be the best way to get a fee-free card without putting down a deposit. They still function as regular credit cards. Your payments, balance and credit limit will be reported to the credit bureaus, all helping your credit, providing you consistently pay on time. The main difference is that your student status makes it a little easier to qualify for the card with no credit history.
Using Secured Cards to Build Credit
Unfortunately, if you are not a student, as a new immigrant with limited or no credit history, your options are limited. Simply, with no idea of your financial habits, lenders are wary of extending credit to you. Secured credit cards are a good solution to this. Secured cards require a deposit from you, protecting lenders from losing money from you defaulting. However, they give you an opportunity to demonstrate that you will consistently pay your bills on time. Like other credit cards, your usage on these cards also gets reported to the credit bureaus. In time, once you establish your credit, you can typically convert a secured card to a regular card or apply for a new card.
Using a Car Loan to Build Credit
Car loans are collateralized by the car being purchased, meaning that if you default on your loan, the lender can repossess the car, recouping some or all of their loss. This also means that some lenders may be more willing to extend a car loan to someone with little or no credit, although the lender may require a larger than usual down payment to help protect them. Just like credit cards and other debt, your payment history is reported to the credit bureaus, so each payment will build your score and give lenders a better idea of what kind of borrower you are.
Of course, with no credit score you may only qualify for a high interest loan. To avoid spending too much on interest, start with a cheaper vehicle and make a large down payment. This keeps the financed amount low, which in turn keeps the amount you pay in interest low, regardless of the size of the loan. After a year or two of making regular payments, consider re-financing your loan at a lower rate, since you’ll now have a better credit history.
Get a (Credit) Record
As a new immigrant, it may be frustrating that at first you have a hard time getting a loan. The bottom line is that lenders just want some indication that you will be a responsible borrower. Your only option is finding the few loans that you do qualify. Pay them off in a timely manner. Take comfort that in a short amount of time, provided you pay all your bills on time, you will have no problem qualifying for a loan at all.