Introduction by USLawforNordics
The U.S. is said to be the land of opportunity, but there’s a big obstacle for taking advantage of that opportunity for foreigners: establishing credit. Many new immigrants quickly learn they can’t easily rent an apartment or buy a car because they have no U.S. credit history. After living, working and paying taxes and managing your financial situation spotlessly your entire adult life in your home (Nordic) country it may come as a big surprise that your spotless management of your personal finances means nothing in the U.S. With no credit history there are limited options to open a credit card. With no credit card, you can’t start building your credit history, but because you don’t have a credit history can’t get a credit card. Confusing, we know! If you play it safe, meaning you don’t have, and don’t want to have, credit cards, loans, rent instead of buying a house etc. – you have no “credit score” – which is almost as bad as having bad credit. This week’s blog is about credit scores and why you need to spend time on understanding how to become eligible for any type of loans or leasing objects in the U.S. And why you shouldn’t feel insulted, if you manage to open a credit card, when the credit limit you’re awarded on your first American credit card is lower than what your Nordic bank gave you back when you were still sweating on your first job as a teenager/young adult.
CREDIT SCORE 101
First off – What’s a credit score?
Your credit score is a range between 300 and 850. The score is used by lenders, service providers and landlords to determine your credit worthiness. There are three main credit reporting agencies: Experian, TransUnion and Equifax. They compile a report based on things like credit card use, payment history, and length of time you’ve been using credit. Your score will vary slightly between agencies but they all use FICO (Fair Isaac Corporation) scores. FICO has a very helpful website if you want to learn more.
And why do I need one?
The fact is that in many cases you will need a decent credit score for a cell phone contract, car loan or credit card. If you’re planning on purchasing any property while you’re living in the US, it’s vital you start thinking about building good credit soon after you arrive. The higher your credit score, the more likely you are to be approved, and to be offered a better interest rate.
You should probably also know that you may need a good credit report for your career, as well as for your financial health. Indeed, some employers may look at your credit report as part of a background check.
How do I build my credit score?
To build credit a good credit score you have to get access to credit and show that you can manage debt. So, the credit agencies aren’t interested in if you earn a good wage, budget carefully and save money each month. Paying your debts on time each month – including rent and utility bills, for example – is the most significant factor in affecting your score, according to the Federal Deposit Insurance Corporation (FDIC).
It’s also a good idea to have a good mix to your credit portfolio. You may want to consider having a couple of credit cards, a store card and a car loan to create variety. In many European countries taking on debt is viewed poorly but used wisely credit can be a powerful financial tool and using credit products is a necessary step to build a good credit score.
If my credit score is based on my ability to manage debt, should I max out my credit card each month?
If you spend to the limit of your credit cards each month it’s an indication to the credit bureau that you’re living at the edge of your means. They may think this is a sign you’ll have trouble paying bills in the future, so try not to use more than 30% of the credit available to you on any given card. So, if you have a card with a limit of $1,000 try not to spend more than $300 on it. If you have access to a total of $10,000 in credit, try not to spend more than $3,000 across all cards. By doing that you indicate that you can manage credit well: you could spend more, but you don’t. This is known as the credit utilization ratio. It is one of the most important factors credit scoring models use to calculate your credit score.
Also, try to pay your statement in its entirety every month. If you can’t, then make sure to at least make the required minimum periodic payments on time
WHAT TO AVOID:
Make late payments
It goes without saying that late payments negatively impact your credit score. But what if you go back to your home country for a month and forget to pay an installment on your car loan? Is there a way out? Well… maybe. Get in touch with the loan company and ask them not to report the late payment to the credit-reporting agency. They’re not obliged to help you, but if it truly is a one off, they may be willing to negotiate.
Apply for 5 credit cards at once
While having more than one credit card can improve your score, applying for lots of cards at once can have a negative impact. So start with one card and build slowly. And don’t open credit accounts you don’t intend to use. You need to spend something on your cards each month to make them count.
Do I need a Social Security Number?
While technically not essential, a Social Security Number (SSN) is very important for starting your credit history – especially if you are working in the United States. Having an SSN allows credit reporting agencies to start a credit file for you as your employer reports your wages to the government. It’s much more difficult to build credit without an SSN. Some creditors allow you to apply for a credit card without an SSN, but without a credit score it’s unlikely you’ll be approved. And if approved, without an SSN it’s harder for them to identify you correctly. Read this for more info.
How do I get credit without a credit score?
Even though it might seem complicated You DO have some options! Some banks will let you take out a secured credit card. That means you give them $500 and they give you a credit card with a $500 limit. It’s a good place to start but there are a couple of pitfalls: firstly, you have to tie up your own capital and secondly, financial institutions will usually only do this with such small amounts that it will take you a long time to build a good credit score (NOTE: Some secured credit cards may have fees or a higher interest rate, so it’s important to shop around, as the FDIC suggests in this article.)
If you held a credit card in your home country and the company operates in the US, they may give you a credit card if you had a good relationship with them. But they are not obliged to do this, by any means.
Bank of the West offers an unsecured credit card dedicated to expatriates and international hires want to start building their credit history.
How do I track my credit score?
There are a few websites that let you access your credit score for free. I personally use CreditKarma, but you can also check your score directly on the credit reporting agencies’ websites. For example once your credit score is established, you may order an annual report from AnnualCreditReport.com (or call toll-free 1-877-322-8228) to keep a record for yourself and to check for possible errors.
If you’re new to the US, you may discover that you have a ‘thin file’. That just means they don’t have enough information to generate a score. It usually takes six months before a credit score can be calculated, according to Experian. Get some credit, manage it well, give it time and you’ll soon have a credit score all of your own.
