How to start a credit history in the USA: An Immigrant’s Guide
It is common to wonder how to start a credit history in the USA. Limited or no credit history can make it challenging to qualify for financial services. Since credit histories typically don’t transfer between countries, you have to build your credit score from scratch. It will take time and careful planning, but it is possible to get the credit score you need to build the future you’ve dreamed of.
Why is it Important to Establish Credit?
Credit scores were developed as a way for a person or company to quickly assess potential risk in lending money. Lenders want you to have a good credit score before they will let you borrow money or offer low interest rates. Landlords use credit to determine whether you are likely to pay rent on time when deciding whether to let you rent an apartment.
Some employers even consider credit when making hiring decisions-- for example, banks or customer service roles-- to ensure that you can be trusted to handle company funds.
The lack of credit history typically means you will be asked to take additional steps to prove your ability to pay your bills and can often mean you do not qualify for the best interest rates. Higher interest rates lead to you paying more for something.
In short, credit can affect almost every area of your life, from housing to employment to your ability to purchase cars or a home. Even just 6 months of credit history will dramatically change your credit score and set you up for success.
Zero to Hero: How to Go from No Credit to Good Credit
Wondering how to establish credit in the USA? There are five factors used to calculate your credit score, each weighted differently:
Payment history: 35%
Credit utilization ratio: 30%
Credit history length: 15%
Number and types of credit: 10%
Account inquiries: 10%
As you can see, the first two factors are weighted more heavily than the other three factors combined, so they are the most important. You also have the most control over them.
Payment History
Payment History is exactly what it sounds like: your history of making payments on time for bills that are reported on your credit report, such as loan payments and credit card payments. More recently, certain living expenses such as rent and utility payments can be reported on your credit score, but this can vary depending on your service provider.
In general, you can build this part of your credit score by paying bills on time and living within your means.
Credit Utilization Ratio
Your Credit Utilization Ratio is the amount of credit you’re using compared to the amount of credit available to you. To position yourself to earn a stellar score, you should aim for a ratio of 10%. That means if your credit limit is $5,000, you should keep your balance under $500.
Of course, life happens. If an emergency expense pops up and you go above 10%, it won’t undo all your progress. Just try to pay the balance back down to 10% as soon as possible.
However, you should avoid exceeding a credit utilization ratio of 30%, as this can cause harm to your credit score. Keep in mind that, according to FICO, consumers with a score of 800 have an average credit utilization ratio of 7%.
How to Establish Credit in the USA
It seems like an endless loop: you need credit to build credit, but lenders won’t work with you until you’ve built credit.
Fortunately, there are organizations built to help you break out of the endless cycle.
Credit card companies like Sable and Petal offer secured and unsecured credit cards to help you build your credit when you have none. No matter which credit card or loan company you choose, the most important thing to look for is whether or not a provider reports your payment to the three credit bureaus in the United States: Experian, Equifax, and TransUnion. If the payment is not being reported, it is not impacting your credit score and not helping you.
Using a Credit Builder Loan to Build Credit
Another way to establish first-time credit is to use a credit builder loan.
When you take a credit builder loan, you don’t actually receive the money. The money stays in an account that you cannot make withdrawals from. However, you still make payments as if you had received the money, until the loan is paid back.
For example, say you take out a credit builder loan of $600 for 6 months. You don’t receive $600; you pay $600 that is then locked in an account. However, you would still make monthly payments of $100* per month for 6 months until the “loan” is repaid in full as if you had received the $600. At the end of the loan term, you will have access to the original $600 locked away as well as the additional $600 you paid to the lender.
This reduces risk for the lender, since they do not actually give up any money, while allowing you to build your credit score and show your trustworthiness as a borrower.
*Note that Credit Builder loans still charge interest, typically 6-16% annually. But to keep the math simple, a 0% interest rate is used in this example.
