How to Build a Great Credit History

One of the early concepts you want to grasp is credit, a credit score, and how to get a great credit score, aka build a great credit history. Building a credit history is essential. It is the foundation of your finances in the United States. The United States is a credit-based society, meaning your credit score and creditworthiness are critical. If you come from a country where the concept of credit is foreign, you likely are wondering where and how to get started with credit and what it means for your financial future.

As a new immigrant, you likely will not have a credit history in the United States. This makes it hard to get approved for loans, including a car loan, a mortgage, a personal loan, and other forms of credit.

It is important to start building your credit as early as possible. This will help you establish a good credit history and qualify for better terms when you need to borrow money. In this blog post, I’ll discuss a credit score, why it’s important, and how you can build a solid credit history from scratch. I’ll also cover some of the challenges you may face and provide tips on how to overcome them. Before learning about credit scores, you need your social security number, so check out this blog post on how to get one.

What is a Credit Score?

A credit score is a three-digit number that financial institutions, aka lenders, use to assess your creditworthiness. Your creditworthiness is how likely you are to pay back loans in time, aka how good of a borrower you are and how much of a credit risk you are. The scores range from 300 to 850; the higher, the better. A good credit score ranges from 650 and up. A higher credit score indicates a lower risk for lenders, making it easier for you to get loans, credit cards, favorable interest rates, etc. Favorable interest rates save you money in the long run. It can also make it easier to rent an apartment and enable you to qualify for certain jobs, especially if the job involves financial responsibility.

Your credit score is primarily calculated based on your payment history, how much of your available credit you are using, the length of your credit history, the types of loans you have, and the number of inquiries you have on your credit report.

Payment History: This is a record of how consistently you make payments on your debt- credit cards, car loans, mortgages, and, more recently, your monthly bills. This is a very BIG determinant of your score. Avoid late payments, delinquencies, and defaults at all costs!

Credit Utilization: This measures the amount of credit you use compared to your available credit limit. I recommend you only spend on your credit card what you can pay off in full at the end of the month. Avoid carrying a balance, as this comes with paying interest. If you must carry a balance, I recommend you keep your utilization below 30%.

Length of Credit History: This is the length of time you have had credit accounts. This is one factor that requires patience. The longer the length of your credit history, the higher your score is, and there are no tricks to this, just patience. A longer credit history generally demonstrates a more established and reliable borrowing pattern.

Credit Mix: A diverse mix of credit types, such as credit cards, loans, and mortgages, can positively impact credit scores. It shows you can manage different types of credit responsibly.

Credit Inquiries: Every time you open a new credit account, there is an inquiry on your report. They tend to stick around on your report for two years and will drop your score by a small amount temporarily, but your score typically bounces back in a few weeks to months. However, opening multiple new credit accounts within a short period is viewed as risky behavior. Only apply for credit when necessary. Avoid store credit cards when you first start building credit.

Challenges as a New Immigrant and How to Overcome Them

Because you do not have a credit history in the United States, getting approved for a credit card or other loans can be difficult. I found this annoying because you need to get credit to build your credit history, but because you have no history, you are considered high-risk, and it is that much harder to get a loan. This was incredibly frustrating when I first moved. I will go over tips below on how I personally overcame this, other ways to overcome this obstacle, and how I built a great credit score. See below a screenshot of my most recent credit score.

You may not have a social security number when you first move. You will need a social security number to start to build your credit. Read this post on how to obtain a social security number.

Credit Unions: It is very important that you get a credit card. My first credit card was from a local credit union. This credit union was willing to take a chance on me with no credit history, and this is a good place to start if you are having difficulty getting approved for a credit card at a large financial institution. You may be able to get a credit card from a larger bank if you have a savings and/or checking account with the same bank. Overall, going with a credit Union was so much easier. Either way, make sure you use your credit card responsibly and pay your bills on time. Only spend the money that you have. I also ended up getting a car loan from the same credit union.

Secured credit cards. There are credit cards for newcomers to the United States. These types of cards require a deposit as collateral. These are good starting points if you are having trouble obtaining a traditional credit card and maybe there are no credit unions near you willing to give you a credit card. Some of these cards include Capital One Secured Credit Card, Discover It Secured Credit Card, and US bank Secured Visa Card, etc.

Disclaimer- I do not have any affiliation with these banks or own any of these cards. These are just some available options.

Become an authorized user on someone else’s credit card. If you have family and friends already established here and are willing, this is a good way to ‘borrow’ someone else’s credit history. If you go with this option, ensure to discuss purchases thoroughly with the primary cardholder before spending. They are going out on a limb for you, do not abuse the privilege. As always, use credit responsibly.

Apply for a Credit-Builder Loan: Some banks and other financial institutions offer credit-builder loans specifically designed to help you build credit. These loans hold the borrowed amount in a savings account, and the loan is repaid over a set period, demonstrating your ability to handle installment debt responsibly.

How to Build a Great Credit History

Do not close your oldest credit card. Your oldest credit card determines the length of your credit history. Therefore, your oldest credit card is precious; keep it open and active.

Diversify your credit. I started with a credit card and a car loan from the credit union. These are two different types of credit and helped me build my credit history relatively quickly, especially my car loan payments. Because I was not too comfortable with credit cards when I first got here, I hardly used my credit card in my first year. So a big part of establishing a credit history early on was making car payments monthly.

Pay your bills on time. This is the most important factor in determining your credit score. Ensure you pay all your bills on time, including your rent, utilities, and credit card bills. Late/missed payments have a big impact on your credit score.

Keep your debt low. Your debt-to-credit ratio is another important factor in determining your credit score. Keep your debt low by only borrowing what you need. Do not open credit cards and spend on a whim.

Monitor your credit report. Regularly check your credit report for errors or fraudulent activity. You are entitled to a free annual credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion). You can also check your credit report for free up to daily at creditkarma.com. Credit Karma does a ‘soft’ pull on your credit, which will not drop your credit score. Address any errors you see promptly. You can do this by writing a letter to the credit bureau.

Be patient. It takes time to build a good credit history. Don’t get discouraged if you don’t see results immediately. Just keep using your credit responsibly and paying your bills on time. It took me seven years of paying my balance off consistently every month, avoiding multiple unnecessary hard inquiries, and monitoring my credit to hit 800+. If I did it, you can, too; you will hit >800 if you are consistent.

Conclusion

Building credit as a new immigrant can be challenging, but starting early is important. By following the tips in this article, you can build a good credit history and qualify for better terms when borrowing money.

Building credit as a new immigrant in the United States requires patience, discipline, and responsible financial management. You can establish a solid credit foundation by understanding a credit score, recognizing its importance, and following the steps outlined above. Remember to be diligent in managing your finances, make timely payments, and keep a low credit utilization ratio. As your credit history strengthens, doors will open, granting you access to better financial opportunities, loans, housing options, and favorable interest rates. Your credit score is a key factor in your financial journey, so make it a priority to build and maintain a good credit history.

You’ve got this!