Ep 02: Zero to 850 – How to Build U.S. Credit History
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In this episode of the International Money Café Podcast your cohosts Jane Mepham CFP® and Manasa Nadig, EA discuss how to go about building U.S. credit history in the country when you are a brand-new immigrant.
The U.S. credit score is critical in the U.S., as it’s heavily relied on by institutions to judge you financially. The problem is you most likely have zero history when you first move to the U.S. as a permanent immigrant or as a foreign national on a nonimmigrant visa.
Listen as Jane and Manasa explain what the credit score and history are, how it’s calculated, how to start building it, and finally how to maintain it once you have it going.
The views and opinions are those of the speakers, and should not be considered financial, tax, or legal advice. Consult your advisor for any legal, cross-border tax, and financial advice.
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Speaker 1 (00:06):
Welcome to the International Money Cafe Podcast, the show where we filter out the noise on cross-border taxes, finances, and life in the us. I'm your host, Jen Metham, CFP.
Speaker 2 (00:18):
I'm your host, ADE. Yay. Join us on this journey as we explore these unique challenges facing us, inbound outbound families and businesses onto the show.
Speaker 1 (00:30):
Hey, Manasa.
Speaker 2 (00:32):
Hi there, Jane.
Building U.S. Credit
Speaker 1 (00:33):
In today's episode, we're going to be talking about building us credit. We want to talk about what it is, what it's used for, how to start building it with zero credit history, and finally how to improve it.
Speaker 2 (00:48):
That's really important information for those of us who have been living here for a long time or you grew up here, this is a term that you almost take for granted. This is something that you talk about a credit score, and that is something we are all used to, but it is a term that is important to learn for someone who has landed in the us. So tell us, Jane, what is a US credit score?
What is a Credit Score?
Speaker 1 (01:18):
So the US credit score, as it's used in the US, is a score that actually determines your likelihood of paying debt back. It predicts how good you are at managing debt, basically borrowing and paying back money, and it's calculated using information in what's called your credit report, which we'll be talking about. There are different types of scoring, which again, we'll address a little bit later. But the bottom line is it's something that every foreign national, every foreign born person coming to the US really needs.
Why is a Credit Score Important?
Speaker 2 (01:54):
Yeah, definitely. But let's talk about why is a credit score important before we dig into all of the other aspects of it that you just mentioned.
Speaker 1 (02:05):
Oh, sure. So the way the US credit scoring is used in the us, believe it or not, almost all lenders actually. Basically all lenders use it to judge you. Something like 90% of lenders use it to judge you to see how credit-worthy you are. Let's say you want to borrow money for a mortgage and they really don't know where you're coming from. So the only way to determine whether you should get the money or not is to actually look at your credit history. Like I said, it's used by everybody. It's relied on heavily to judge you financially. Of course, third party lenders will use it to assess the risk of lending money, like I said. And some of these lenders will include folks like banks, credit card companies, card dealers, mortgage lenders. Exactly, exactly. They use it to determine what type of interest rate to give you.
Speaker 1 (02:59):
The other one that you're going to find interesting or people might find interesting is apartment owners. You want to rent an apartment will rely on this heavily to determine if you are worthy of becoming their renter. And it's also used for things like oral homeowners insurance. They will also use it, let's say if you want to go out and buy a smartphone or get cable service or utilities. And believe it or not, employers will sometimes check your credit report, not your credits, because part of the due diligence that they do for hiring, and they're basically looking for signs of irresponsibility and negligence and to get a general sense of your decision making skills and judgment.
Speaker 2 (03:44):
Oh, wow. I suppose it almost sounds as if knowing somebody's credit score gives you a psychological profile of that person as far as how much they can be relied on to pay their debt back, how much they can be relied on to manage their finances, and also whether they're employable. Oh my goodness, that's a lot.
Speaker 1 (04:09):
It is to depend
Speaker 2 (04:10):
On, yeah. Yeah. But I know you briefly said earlier about how this gets measured. Can we talk more about that, Jay? Yes. What is a formula and how does a credit score get calculated based on that formula?
How is a Credit Score Calculated?
Speaker 1 (04:27):
Absolutely. So the three major credit reporting agencies in the us, these are Experian, Equifax, in TransUnion. Their job is to gather and collect your credit information and typically sell it to creditors for a fee. And since the info each of these agency gathers about you may be a little different, the score from each of them can also be a little different. Your overall score is calculated on this formula payment history is usually 35% total amount owned, which includes credit utilization is 30% length of credit history, 15% type of credit, 10%. And then new credit, which includes credit inquiries is usually 10%. And we can draw a nice little chat just to show you what this looks like and the difference core calculations with the most common one that probably everybody knows about called the FC OS score. This was created by a company called the Fair ISA Corporation. It's used by over 90% of lenders, again to judge your credit worthiness. And the range goes from 300 to 850 based on the scoring that I just described actually under this, the FO scoring, usually something like 800 plus your exceptional seven 40 to 7 99, very good, six 70 to 7 39. Good. And then the, there's also a second system called Vantage Core, which combines data from the three agencies while FICO is specific to each agency. Does that make sense?
Speaker 2 (06:10):
Absolutely. So these are all the different methods that these agencies have to collect data from your spending and all of the other information that we talked about earlier, and then condense it into a way to measure where you fall. And depending on how high your credit score is, you can then be eligible for a better rate, maybe at debt and loans. And also if this is being checked for by the apartment you're going to rent or a mortgage that you are applying for or even maybe a car loan or
Speaker 1 (06:52):
Yeah, yeah, absolutely. Yeah, all these things. Yeah.
Speaker 2 (06:55):
Yeah. So the credit score actually then helps you get a better rate of interest. It's a scoring skill. So that's absolutely great information. Now tell me, I remember when we were new to the US and we needed to go out there and get a credit card, it was very difficult for us to actually get our first credit card. And I remember that they were looking for a credit history which did not exist because obviously we had just come to the us. So when you were working with foreign born nationals, we are looking at, okay, they do not have a credit history. They could have a ton of money that they have brought with them to the bank. They have money in the bank, but they don't have credit history. You could almost use the term that they are credit invisible. So how do we make this visible? How do we make their credit visible for foreign born nationals? Let's say
How to Make Credit Visible as a Foreign Born National
Speaker 1 (07:55):
You just made a really great point. You move to this country with thousands of dollars in your bank account, but because you have no US credit history or credit score, you are credit invisible. So there's a couple of things and what I'm going to do is I'm going to sort of walk through a couple ideas of how you can go about building US credit history.
Get a Social Security Number
So the minute you arrive in the us, the first thing you need to do this assumes you are here, you are able to do this, is go out and we can talk about this on another episode, get yourself a social security number or a tax ID number. That's the first thing.
Open a Bank Account
And then go ahead and open a bank account. This is going to be really, really key. And in some cases you can actually apply for a social security number in your home country before you get the immigrant visa.
Speaker 1 (08:44):
But that's besides the point. The bottom line is start by opening a bank account. Once you do that, that banking relationship is going to be very, very valuable to you. You can go to some local banks or a local credit union, but a lot of times bigger banks may prove to be more beneficial as far as building your credit score. So that's one. The other thing you can do is if you have an international banking relationship, let's say I think something like HSBC or Citibank in your home country, you can actually work with them to open a US account before you get here using that international banking relationship. And the other thing I've also found, especially for let's say executives and folks like that, that same bank may be willing to give you a US credit card as soon as you get here or even before you land here, as long as you're taking advantage of your international banking relationship.
Speaker 1 (09:47):
You can also go to a partner bank. So again, let's say you have Citibank in your home country and they partner with X, Y, Z in the us, reach out to the partner bank and they'll be willing to open the bank account for you as soon as you learn, as well as give you a US credit card if you are lucky. There's a couple other ideas. So that's one.
Apply for an Unsecured Loan
The next thing is apply for an unsecured loan once you get here and there's a FinTech company, but I know they've kind of changed, so we have to come up with some other companies that are willing to give folks that just arrived in the US an unsecured loan. And again, the whole idea is it's not that you really need the money. If you do, that's fine, but the whole idea is you can, by starting to pay money back on this, you'd be able to start building some type of US credits called because they end up reporting it to the bureaus.
Speaker 1 (10:47):
And in some cases you actually may not need the social security or the IT number, but you do need to find the company that we're talking about yet.
Use Your International Credit Report to Apply for a US Credit Card
Another idea is, this is an interesting one actually, and I think a lot of people should take advantage of this, use your foreign or international credit report to apply for a US credit card. There's a new FinTech called NOVA Credit, which is cross border credit bureau and they've partnered with other business entities to give you oral loans, student loans and that kind of thing. The FinTech company partners with credit bureaus in other countries, for example, Canada, India, Nigeria, South Korea, and they're adding more onto the list. And with your permission, they'll share your foreign credit history translated to US equivalent score with US lenders again to judge your credit worthiness. So if your country is included on the growing list, you can apply for us credit cuts like American Express and Citi and start creating your US credit history right away, taking advantage of what you already have.
Speaker 1 (12:06):
This particular bureau that I'm talking about was actually started by immigrants. So they really do understand the pain of being new to the US credit system. A couple other ideas you can apply for a secured credit card in a couple examples. Basically what this ones do is you put down a security deposit and the amount becomes your credit limit. So for example, let's say you do a secured credit card and you put down a thousand dollars on this card, your credit limit now becomes a thousand dollars. The credit card company is not in any danger of you not paying because you're holding your money, but it also gives you a chance to start building your credit history. And what I like to say to folks is, if you do this, remember the deposit is not to pay down the monthly charges and interest, so ensure that you are actually paying those on time. And I do have to call out that you do need a US bank account for the security deposit in a US
Speaker 1 (13:16):
ID number, which is again is a social security or the it. And of course the best thing is check with whoever you're looking at to give you this credit card. And in terms of how they report to the credit bureau, what I like is there's no difference in how they report. So if you are literally starting from scratch, this would be a really good way of doing it. But of course, keep in mind that they're likely to have some very high interest rates since again, the creditor believes they're taking a risk with you, but you can shop around for one with no annual fee reports to all three agencies and have some sort of a grace period as you're doing this. Couple other things is you can also apply for a US credit card with a course signer or become an authorized user on Syms else card. But remember,
Speaker 1 (14:11):
You need to make sure that the person that's a co-signer for you needs to understand that if you end up not paying, they are on the hook for that. Let's see.
Apply for Credit Cards
You can also apply for credit cards. They use other factors besides credit history. So if you have credit cards, they use factors like income, employment history, your banking history, let's say cashflow. You can use that to determine your credit worthiness. And a couple examples that I have in here, there's one called pedal credit cards, and there's also a student one that you can also get on some of this. And one other way of doing this is we've talked about the cosigner is actually have your credit card transferred to the us. So American Express Global Transfer program, what you use your American Express account history, again from your home country to apply for a US credit card and you can apply for different credit cards, but the typical response is to give you the same card as what you already have in your home country. So this is different from NOVA Credit and it's almost like basically I'm using the same credit card, it just happens to be branded for use in the us. Lemme tell you about one one that's really cool. There's a foreign executive lease program where international employees relocating to the US on a temporary work basis. So non-immigrant work visas have the ability to lease a new Ford or Lincoln vehicle at a tier one R.
Speaker 1 (15:55):
So some of the visas that qualify for these are things like L one, H one B, tn E three, E one, and E two visas don't qualify for these, but by letting you get this lease and you making on time payments, you are actually able to start building your credit history.
Speaker 2 (16:14):
Yeah, cool. So my takeaways from all of this great information that you just shared is one is of course planning before you arrive in the US is an important thing to do. Work with a professional who can guide you and help you determine all of these. Also ending on which country you come from, this pre immigration or pre your US trip planning becomes even more important because there are aspects in this like the NOVA credit score or your ability to get a credit card which is associated to the country you are coming from, but as a US credit card and it helps you build a US credit score. Of course we are going to go more deeper into the whole pre-migration planning aspect of things, but pointing out that it's always great to do that before you come to the US for many reasons, but also getting information about building your credit history, right?
Speaker 1 (17:18):
Agree. Yeah.
Speaker 2 (17:19):
Yes. So I had a quick question about the American Express part of it that you just spoke about. How does that work, Jean?
American Express Global Transfer Program
Speaker 1 (17:29):
Oh, the American Express Global Transfer Program.
Speaker 2 (17:32):
Yes.
Speaker 1 (17:33):
So you have an American Express account from your home country. Let's say you're coming from, I don't know, uk, France, and you already have, because remember American Express is pretty much everywhere. So you want to make sure you get into their global transfer program before you get here. And as you get here you say, I'm a part of this program. They can't let you literally use that history in your home country to apply for a US credit. So when you think about it, you already were assuming you're already doing a pretty good job with your American Express credit card in your home country. So it's literally a continuation of that. The only difference is you actually have to do it once you get to the us It's probably one of the easiest way I tell people to look into, if you already have the American Express card and it's a program that's out there, it's absolutely worth looking into and it kind of goes into, I have to look at other companies, but if you already have some sort of a global company that's giving you a credit card in your home history, before you look to start applying for new cards here, check to see if they have some reciprocity type of arrangement with the providers in the US and hopefully you can make use of that.
Speaker 1 (18:54):
Does that answer your question?
Speaker 2 (18:55):
Absolutely, yes.
Speaker 1 (18:56):
Okay.
How do I Maintain a Credit Score
Speaker 2 (18:57):
It did. It was clear. Okay, so now I have just arrived in the US and I have found the means of building my credit history and getting started. I have a social security number or an ITIN and opened a bank account and all of that good stuff. How do I maintain my credit score, which is also important because all those scores are not just a one-time shot, right? True. We need to keep up with those because we are going to continue to have a life and do business in the us and also if your credit score for some reason takes a hit and what are those times that it could possibly take a hit and how do you improve your credit score, what do you suggest that we can do?
Speaker 1 (19:47):
The first thing is congratulations on establishing some type of credit history.
Pay Bills in Full
So the first thing you need to do is pay attention to when bills are due and pay them in full. So I'd even suggest setting up oral payments so you don't miss a date. I find credit companies tend to be very mean, for lack of a better word. You are late one day $25 and they end up reporting that. So pay your bills on time and in full. That's the first thing. Regardless of where you're coming from.
Keep an Eye on Your Credit Report
And then keep an eye on your credit report, you can get an annual free report from each of the three bureaus that we talked about. So typically giving you three free reports per year, you obviously don't need to do this in year 10, but initially where you're trying to figure out where you are, it's absolutely worth getting that free report every quarter. And then keep your credit utilization law we talked about is
Speaker 1 (20:48):
That one of the factors that they look into. And as you get more credit cards, the funny thing is once your credit score improves, you're going to start getting a lot of offers. Obviously you want to keep an eye on what you are accepting, but as you get more credit cards, refrain from closing old ones. But if you do have a plan in place to avoid a hit on your score, so you just want to be thoughtful about how you do this. I'm not recommending you go out and get 10 credit cards, but that's something you want to think about.
Keep Your Account Active
And then keep the account active, even if it's just charging once small item every couple months, just don't let them be dormant because at the end of the day, think about it, credit card companies make money when you spend money so they can charge you interest. So you spend money on this thing. But then of course you know to pay your bills and time and on full. So keep the accounts active and if you have services that offer to raise your score, my advice has always been treat them with some suspicion because these things just take time. So be very patient and over a couple months I think you will find yourself on the way to becoming credit visible.
Speaker 2 (22:05):
Definitely. And one thing that I have also noticed, just like you said, the more you have established your credit, then there are more of those credit card companies and other institutions willing to offer you more, increase your debt limit and offer you more credit cards. Maybe it could also be a good idea to then shop around and see if there is a lower interest card rate that you can move your debt to if you have debt at that time. But definitely a lot of great points about maintaining and improving your credit score. So this has been a lot of great information, Jane. Wow. Definitely something that we should know about. And especially if you just come to the US and you're not familiar with the term credit score, like you said, there are other countries now that do have the system in place which you can transfer over and use that in the US as well. Any last bit of information that you want to leave with our listeners and then we can wrap up today's episode.
Speaker 1 (23:15):
So ideally, and this is going to sound like a contradiction, you won't have any debt, but what I keep saying is you just want to learn how the system works, become a student of the system, the US financial system, understand how it works. It almost seems like playing games, but the key thing is just understand how the system works. I'm not saying go out and borrow a ton of money, but once you understand how it works, you'll understand where this will play a role in your US finances. And I think if you do that, you have a shot at achieving your American dream.
Speaker 2 (23:51):
Cool. Awesome. Let's wrap up this episode right here with that famous call to achieving your American dream. Alright, see you next time.
Speaker 3 (24:03):
Thank you. Bye
Speaker 1 (24:04):
Bye.
Speaker 3 (24:05):
Thank you for listening to the International Money Cafe podcast. The content is for informational and educational purposes only and should not be used as a substitute for professional advice. Seek the advice of your qualified service provider with any questions you may have regarding your cross order finances and tax needs.