When relocating to a new country, it’s an exciting time as the start of a new chapter. But there are also some challenges that tend to pop up after arrival. One major challenge for those relocating to the United States is the necessity of building a credit score from scratch.
Upon arrival in the United States, new immigrants don’t have a credit history. With that, they join the ranks of the estimated 26 million people that the Consumer Financial Protection Bureau deems “credit invisible.”
Unfortunately, a strong credit score abroad won’t translate directly into a good credit score in the United States. But it’s possible to harness the power of good financial habits to build your credit score here. Let’s explore how you can build credit after moving to the United States.
Before we dive into the nitty-gritty details of how to build credit, it’s important to clarify why you should bother to achieve this goal in the first place.
Here’s a closer look at the reasons why you should consider investing time and energy into the goal of building credit.
The major benefit of a good credit score is that you can access better financing opportunities.
If you are planning to make any major purchases during your tenure in the country, it’s likely you’ll rely on the help of financing. After all, most Americans tap into loans to make major purchases, like a home or vehicle.
Not only will a good credit score get you access to the loan, but it can also help you save thousands on interest payments over the life of the loan. That’s because lenders are willing to offer lower interest rates to borrowers with better credit scores.
Here’s a closer look at how those interest savings can really add up over time:
Buyer 1 has a high credit score of 790 which allows them to tap into a 4% interest rate. They take out a loan for $40,000 to purchase their new ride. With a loan term of 60 months, their monthly payment is $736.66. Over the life of the loan, they’ll pay $4,199 in interest.
Buyer 2 has a lower credit score of 650 which allows them to get a credit score of 7%. Like Buyer 1, they take out a loan with a 60-month term for $40,000. But their monthly payment is $792.05. At the end of the day, Buyer 2 pays $7,522 in interest.
With a lower credit score, Buyer 2 faces both a higher monthly payment and pays more in interest over the life of the loan. Not only can a better credit score make a difference in your monthly budget, but also in your long-term financial plans.
Even if you aren’t planning to make a major purchase in the United States, a good credit score can come in handy while fulfilling other basic needs. For example, many landlords will run a credit check before they approve your lease.
Landlords often take this precaution because they want to see if you have a history of making on-time payments. After all, the landlord wants to see your rent check arrive on time each and every month. By renting to tenants with a good credit score, they can feel more comfortable about moving forward with the lease.
Need more motivation? Explore the top reasons why having a good credit score matters.
Although you can likely open a credit card of some kind with a bad credit score, it’s unlikely to come with the top perks. In fact, those with a bad credit score are likely to get stuck with a card that’s charging extremely high interest rates and fees.
With a better credit score, you can tap into a credit card that offers rewards and benefits. Premium rewards credit cards help you stretch your spending a little bit farther with the cash back or rewards points to use as you see fit.
The right rewards card for you varies based on your goals. But one thing is certain, everyone can benefit from harnessing the power of extra perks while spending what they were already planning to. For example, I regularly use travel rewards cards to get more bang for my travel bucks.
With a better understanding of why building credit is important, let’s explore the strategies you can implement to help your credit score.
First things first, it’s important to see where you stand. Although you might be just arriving, take a minute to check out your credit score. It’s possible you’ve already started making an impression on your credit score since your arrival.
Here’s a complete guide on where to get your credit score. Luckily, this step can be completely free.
Determine where your credit score falls on the scale:
If you don’t have a credit score at all, you won’t show up on the scale. But in any case, it’s a good idea to see where your journey is starting from. Not only can this step help you visualize your success, but also look back on progress along the way.
A credit score is a reflection of the information on your credit report. With positive information on your credit report, you’ll likely have a good credit score. But negative information on your credit report often leads to a bad credit score.
As you start the process of building your credit, it’s critical to check in on your credit report occasionally. The reality is that mistakes can make their way onto your credit report and negatively impact your credit score.
Whether the mistake is a mix-up with a lender or a more serious case of identity theft, it’s best to spot this mistake sooner rather than later.
Your payment history accounts for 35% of your FICO score, making it the most important factor in determining your credit score. And the good news is that making on-time payments is something entirely within your control.
As you open credit accounts, make on-time payments a priority. If you aren’t sure you can keep track of all the deadlines, take advantage of technology to avoid a late payment. Most bill providers offer automatic payment options that you can set up and forget about.
But if you have a cash flow problem, you might not have the funds you need to get your payments in on time. If that’s the case, reach out to the creditor as soon as possible to inquire about financial hardship programs.
When it comes to revolving debt, like a credit card, a low credit utilization ratio is a positive factor in your credit score. If you are working to improve your FICO score, it’s best to keep your utilization ratio below 10%.
But how can you calculate your credit utilization ratio? The simple math behind this equation is to divide the account balance by the credit limit.
For example, let’s say you have a credit card with a $5,000 credit limit. If you have a balance of $500, then your credit utilization ratio on that account would be 10%.
Your overall utilization ratio is also important. This is the ratio of the total balance on all your credit cards to the total amount of available credit on all your cards.
When you have lower credit limits, it’s all too easy for your credit utilization ratios to get a bit higher than the recommended levels. One way to combat this issue is to ask your credit card issuers for a higher credit limit. In some cases, they might be willing to oblige your request. It’s helpful if you can point to a recent change in your finances, like a raise at work, when stating your case to the customer service representative.
Secured credit cards are one traditional way to build credit from scratch.
When you are approved for this type of card, you’ll make a deposit that acts as collateral for your spending. If you don’t pay your bills on time, the lender can commandeer your collateral as payment. Since this lowers the risk for the lender, many credit builders find it relatively easy to open a secured card.
But these cards typically come with low credit limits. With that, it’s important to be careful with your spending to avoid pushing your credit utilization ratio too high.
A credit-builder loan is a non-traditional way to build credit. Through this financial product, you can build credit and savings at the same time.
Here’s how this type of loan works in practice:
If approved for the loan, you won’t receive any of the funds upfront. Instead, the lender tucks away the loan principal into an account designated for you. The lender will expect you to start making payments right away.
Throughout the loan term, the lender will report your payment activity to the credit bureaus. If you are making on-time payments, this can give your credit score a boost. If you are making late payments, a loan could end up hurting your credit score.
At the end of the loan term, you’ll get access to the principal amount. Depending on your financial situation, this could be a great way to build credit. But it may not be the best option if your budget is already stretched a little thin.
As you monitor your credit report, mistakes might pop up. If you spot a mistake, it’s important to start the process of removing the error right away.
With only a handful of mistakes, it’s fairly easy to tackle this financial chore on your own. Start by gathering information that details the nature of the mistake, then contact the credit bureau with this information. If the credit bureau agrees with your assessment, they’ll have it corrected within a few weeks.
But if you have an extensive number of mistakes on your credit report, turning to the professionals at a reputable credit repair agency can be worthwhile. These agencies have experience dealing with these exact situations to help you resolve the mistakes dragging down your credit score.
Although becoming an authorized user isn’t a surefire way to boost your credit score, it can add positive information to your credit report.
If you have friends or family members with credit card accounts in good standing, consider asking to be added as an authorized user.
Depending on your situation, this could help your credit score. But this strategy isn’t guaranteed to work for everyone. It all depends on how the account is managed and how it compares to the accounts currently in your credit file.
Even if you are doing everything right, building credit isn’t something that happens overnight. Of course, everyone wants to see immediate results. But that’s usually not going to happen while building your credit.
In fact, it might take several months before you start to see a hint of your efforts paying off in your credit score. Instead of getting discouraged, adopt a long-term mindset about credit building. Although it might take some time, the right credit score can pay off for years to come.
When moving to the United States, there are plenty of obstacles. Although it’s an exciting step in your journey, there are some challenges you’ll have to face head-on. One of those is building credit.
As you start to implement credit-building strategies, be patient as the results start to impact your credit score. Even though it takes time, pulling these smart strategies into your life can set you up for a bright financial future with access to more affordable financing when you need it.