Why Is Credit In The USA Important?
In America, cash is not king; credit is king. Building your credit history and having a high credit score is essential to American financial life. Credit can even impact your citizenship application so immigrants need to start building their credit as soon as possible.
We’ll explain what exactly credit is and its impact on citizenship. We’ll also discuss the other things that credit is essential for, including housing, transportation, and loans. And finally, we’ll show you how to start building credit in America.
What is credit?
When you see or hear the term “credit” in terms of the American personal finance system, it encompasses two things, your credit history, and your credit score. Credit history is a record of how well you’ve managed your debts. Your credit history includes:
How many accounts you’ve had, open and closed
The types of accounts, revolving (credit cards) or installment credit (loans)
The balance on each account
Your payment history, if you pay on time or late
Negative marks like accounts in collections, delinquent accounts, judgments against you, and bankruptcies)
Your credit history is compiled into your credit report by credit bureaus. The three main bureaus are Equifax, TransUnion, and Experian. They turn this information into a number for your credit score. Credit scores generally range from 300-850:
300-629: Bad or thin. Thin means you don’t have enough credit history to have a credit score.
630-689: Fair
690-719: Good
720-850: Excellent
You don’t need a perfect 850; anything above 760 will make anyone looking at your credit score happy.
Your credit score is made of five components, each one weighted according to how important it is to your overall score:
On-time payments 35%: Do you pay your bills on time or late.
Utilization 30%: Of your total credit limit, what percentage are you using. Potential lenders want to see a utilization under 30%; the lower, the better.
Length of credit history 15%: How long have you had credit. This is why it’s so essential for new immigrants to establish credit as quickly as possible in the US.
Type of credit 10%: Potential lenders like to see a mix of revolving and installment credit accounts.
New credit 10%: How often do you apply for credit. Frequently applying for new credit can be a red flag to potential lenders.
All of the points we’ll discuss below are the reason credit is important in the USA. Each of them requires credit. When you attempt any of them, someone is going to pull your credit report and credit score.
Based on them, they will make a decision. The better your credit, the better your chances of getting the result you want, whether that’s becoming a naturalized citizen or borrowing money for college, or starting a business. And the better your credit, the better the interest rates you’ll be offered when you borrow money. This matters a lot because the lower your interest rate, the cheaper it is to borrow that money. Even a slight difference in interest rates can mean your loan is thousands of dollars more expensive or less expensive.
Credit and Citizenship
Whether or not your credit is used as part of the determination process for citizenship changes. In the past, it has been a factor, but under the administration currently in power, that is no longer the case. The US holds presidential elections every four years which means whatever policy is currently in place, could be changed. With that in mind, it’s better to act as though your credit score will impact your status.
Having little or no credit history, as is the case for many immigrants, doesn’t impact your path to citizenship but it can make the process, already a long one, even longer.
Having a low credit score may indicate that you won’t be financially self-sufficient if allowed to remain in the US.
Renting an Apartment
Finding a home is a priority of course and new immigrants may worry that their citizenship status will make the process harder. But you do not have to be a citizen to legally rent an apartment. Landlords cannot legally deny a potential renter based on country of origin, religious status, handicap, familial status, race, gender, or age.
A landlord may require you to fill out a supplemental application though. In many cases, small, private landlords may not require this.
Buying a car
If you’ve immigrated from a country with a strong public transit system, depending on where you move to in the US, you might be in for a big shock. Outside of a few major cities, the US does not have a great public transit system. There are plenty of places in the US that have no public transit at all.
If you move to such an area, you will almost certainly need a car. The good news is, anyone can legally buy a car in the US. The bad news is, you need a driver’s license to drive legally but currently, only 16 states, the District of Columbia (Washington DC) and Puerto Rico, allow non-citizens to have a driver’s license or permit.
Non-citizens can also drive legally if they have an international driver’s permit. To be approved, you must have been a legal driver in your home country for at least six months. The permits are valid for one year and can be renewed. They can be purchased from AAA or the American Automobile Touring Alliance.
Buying a home
Owning a home is a dream for people from all over the world, the US included. A home can be a significant financial asset. Non-residents can buy homes and property in the US but doing so does not bestow residency.
Non-citizens can qualify for mortgages, too, and like citizens, most will need to as the typical home price in the US is $287,148, far too expensive for a cash purchase!
Personal Loans
Personal loans can be used for anything; educational, medical, or dental expenses, debt consolidation, home improvements, starting a business, and more. You do not need a Social Security card or citizenship to apply for or be approved for a personal loan.
Some lenders specialize in making personal loans to non-citizens, including Stilt, Upgrade, SoFi, and Earnest.
Interest rates and other terms on personal loans vary from lender to lender, so always shop around for the best deal.
Building Credit
Don’t be overwhelmed at the thought of building credit. It can be done and there are several ways to get started:
Credit cards, both secured and unsecured are a great way to build credit. Petal and Jasper both use metrics other than just your credit score to approve your application.
Credit builder loans help build credit as a traditional personal loan would.
Linking your bills to your credit score is a great credit-building tool because it can add several accounts with on-time payments (As long as you pay on time!) to your credit report.
Personal loans as described above.
Upwardli has partnered with financial service providers who understand the needs of newcomers to the US. We can help match you with the resources you need to understand the US financial system and build the foundation for your financial life in your new home.
