As you plan for your future in the United States, one thing that you need to consider, is your credit score. You will need to work on your US credit score in order to apply for a range of things, from a phone plan to a home mortgage. The US system may initially seem very unfamiliar for new migrants, but once you get the hang of the basics, you’ll soon be on your way to build your credit score as a new immigrant in the US.
What is a Credit Score?
Your US credit score indicates your credit worthiness. It’s a number between 300 and 850, and is calculated from your past credit reports, your payment history, debt, the length of your credit history, and so on. It’s a strong indicator of how likely you are to pay your debts in time. It’s obviously a very useful number for a lender to have when they are considering whether to approve a loan application or not, but it can be a very useful number for the borrower as well, as you’ll find out.
Why Do You Need a US Credit Score?
There are several situations that involve the assessment of your credit score: you will need it when you apply for a credit card, a mortgage, or if you seek a loan to start a business. If these situations seem unlikely to you right now, then consider the fact that you’ll soon need to pay a rental deposit, or get a phone plan. You need a credit score for such situations, as well. If your US credit score is not up to mark, it can be a significant disadvantage, and your application may be rejected (which will also adversely affect your fledgling credit score!).
The folks assessing your score are three credit bureaus in the US, namely Equifax, Experian, and TransUnion. Credit scores are used by potential lenders and creditors (banks, credit unions, car dealerships, etc) when deciding whether to offer you credit, like a loan or a credit card.
What is a Good Credit Score in the US?
Anything over 670 is considered to be a good credit score, according to the credit bureaus, and if you can manage to build your score to above that number, you will have a lot of financial options open up to you. The average American credit score is 700, though, so if you’re competitive, you may want to set your sights higher!
How Long Does It Take to Build a Credit Score?
According to Experian, it usually takes about six months of regular credit activity before your credit score can be calculated.
Ok, now that we’ve understood the fundamentals, let’s consider the important question:
How Can You Build Your Credit Score as a New Immigrant?
You’ve arrived in the US as a new immigrant, and you’ve just managed to open a bank account. How do you go about building your credit score?
Here are ten ways you can work on building your US credit score.
If you’re starting from scratch (i.e. you just learnt about the credit score and don’t have a credit history to speak of), then the credit score and credit worthiness may seem like a chicken-and-egg problem: how can you get a credit card without a credit score? And how can you build a credit score without a credit card? Well, you have a few options to get started:
1. Start using a credit card (secured or unsecured).
An unsecured Credit Card has no security deposit against the credit limit for the card. A secured credit card is one where you deposit money to the bank before you start using the card. You can then ‘borrow’ through the card up to the amount you have deposited. It’s basically a collateral. This way, you start with cash, but as you make regular and responsible transactions through this card, it will start reflecting positively on your credit score.
2. Become an Authorized User on someone else’s card.
This allows you to ‘piggyback’ on someone with a good credit score (with their permission, of course). If you have a trusted friend with a good record of credit card use, ask them if you can be added to one of their accounts as an authorized user. You don’t even have to use the card, but the impact this move can have on your own credit score is quite significant.
3. Use a US credit card from Day 1
If you can get one, apply for a US credit card from your home country, so that you can start using it as soon as you land in the US. This will help build your credit history from Day 1. Since the length of your credit history is a factor in your credit score, a longer credit history, usually means a better credit score.
Note: with Zolve you can sign up and apply for a credit card before you travel to the US - sign up for early access here
4. Apply for a credit-builder loan.
A credit-builder loan is usually offered by credit unions, and is similar to a secured credit card. You will need to deposit cash into a separate account, and you’ll receive a loan that matches the deposit amount. You will have to repay the loan in installments (with interest). Once you have paid off the loan, you will get your deposit back.
If you already have a credit history, then you will have an easier time. However, you should still focus on improving your credit score as much as possible. A few ways you can do that are listed below:
5. Pay your bills on time.
Even if you are only able to pay the minimum amount due, make sure you pay it on time. Your payment history (including how regularly you paid your dues) is an important factor in calculating your credit score. Automate your payments if you have to.
6. Make frequent payments.
These ‘micropayments’ made throughout the month will help keep your credit card balances low, which will improve your credit score. Making multiple payments regularly through each month will improve something called credit utilization, a credit score factor.
7. Pay off your debts before your due dates
Pay off your dues before the last day - over a period of time, this shows that you are a responsible borrower. This will result in lower interest rates, increase your credit score, and will make you a more attractive borrower from the lenders’ perspective.
8. Keep your credit utilization ratio less than 30%.
The credit utilization ratio is the amount of credit you are using compared with the amount you have available. So, keep your credit card balances low, and don’t rush to close a credit card once you have paid it off. One way you can improve this ratio is to ask for a higher credit limit while keeping your usage the same.
9. Check if the Bureau Check will affect your Credit Score.
When you apply for a credit card, an inquiry is generated to check your credit history, which can sometimes bring down your score. Do verify whether the bureau pull is a hard check or a soft check. A soft check does not impact your credit score, while multiple hard checks may - since that shows a greater need for credit. So, when applying for additional credit cards, do check whether the verification will affect your credit score or not.
10. Diversify your credit types.
Get a loan if you only have credit card debt, or get a credit card if you only have student loans. This is not to increase your debts, but to have a good credit mix. A loan is an installment credit, and a credit card is a revolving credit. Having both types can boost your credit worthiness. This, of course, should not come at the cost of borrowing more than you can repay!
Extra Tip: Check your credit reports regularly, ideally once every year, from Annual Credit Report. Scan the report for errors, and request for a correction if you spot one. You are also entitled to a free report every week from the three major credit bureaus.
You may feel overwhelmed by all the information you’ve just read, but don’t worry. When it comes to credit scores, planning can go a long way. You will get better at managing your score with time, patience and dedication, and build a US credit score you can be proud of!
Zolve can help you with your cross-border finances, starting before you even step out of India. Reach out to us to know more.
