5 Ways New Immigrants Can Build American Credit (and What to Watch Out For)
By Lauren Bringle, AFC®
Whether you are a permanent resident, becoming a permanent resident, or just planning to live and work in the U.S. for a while, building credit here can be important.
Depending on what country you come from to get to the U.S., your relationship to credit – and finances in general – could look completely different.
Some countries, like France for instance, don’t have a credit system, while other countries base your ability to repay debt solely on your income.
Some credit systems, like those in the U.K., Canada and Australia, are similar to the U.S. system, but credit scores and history from those countries do not transfer, and immigrants from those countries still have to build credit in the States. See our related article about whether credit scores transfer from Canada
No matter where in the world you come from, the one common denominator between all new immigrants to the U.S. is that the credit scoring system here is just different.
That’s why we put together this list of ways you can start to build credit in the U.S., as well as what to watch out for as you start to navigate the American financial system.
Before we get to the list, let’s take a look at how the U.S. credit system works in general.
Overview of the U.S. credit system
The U.S. is somewhat unique in its reliance on credit. Unlike some countries, where many people try to avoid using credit since too much debt could land you in jail, credit usage in the U.S. is very common. In fact, for many people here, making major purchases – like buying a house or car – is almost impossible without it.
And, while there are definitely consequences to misusing credit here, they do not include jail time.
In the U.S., your credit history is basically a financial resume that lenders (and in some cases landlords and potential employers) use to determine your trustworthiness as a borrower, renter or employee. Your credit history also helps them determine the risk you might pose if they decide to extend that trust to you.
There are other reasons you might need credit that are not directly related to buying something. For example, landlords often run credit checks
before you can rent an apartment. Many employers run credit checks as part of the employee screening process
when making hiring decisions. Credit checks play a particularly large role in financial services and government jobs sectors too.
Your credit score is a number that ranges from 300-850 that reflects how you use credit, with 850 being the best. A good credit score is generally 700
or above. Your credit score is based on five factors:
- Payment history
- Amounts owed
- Types of credit used
- New credit
- Length of credit history
To get access to new credit accounts, you typically need a credit history, which is where things can get tricky. However, if you know the right place to start (and some products to start with) you can start building credit sooner. All you need is a social security number or an Individual Taxpayer Identification Number.
Just remember, building credit takes time.
It can take anywhere from a few months to a few years to build enough credit to buy a house, for instance, depending on your situation.
How can a new immigrant establish credit?
While this list does not cover everything you could try to build credit for the first time in the U.S., here are five common ways you can start building credit. Some of these suggestions could also apply to you if you want to rebuild bad credit now that you have been in the States for a while and are more accustomed to how credit works in the U.S.
1 - See if your existing bank will open an American credit card for you
This option only works if you already bank with an international bank or credit card provider that has an American presence, and in some cases, have not yet left your home country. If you meet that criteria, see if your existing card provider will let you open a card in the U.S. using the credit you already have.
For example, in certain cases
, American Express will let you apply for one U.S. credit card before you leave your home country. To do this, you must:
- Be an existing cardholder who is the primary on the account
- Have an account in good standing
- Have had your card with them for at least three months
These rules only apply to the first credit card offer, however. You have to wait to apply for any additional U.S. credit cards through them until after you have established local credit history in the U.S.
Some larger international banks might also offer these services. Check with your current card provider or bank to see what options they have available.
2 - Get a credit builder loan
A credit builder loan
is a type of reverse loan, which means that you receive the money at the end of the loan, not the beginning. By holding onto the loan funds as you make payments, the lender is able to minimize their risk while you prove yourself to be a reliable borrower.
This means you do not already have to have a credit history to gain access to a credit builder loan. As long as you make your payments on time and in full, you build positive credit history.
__Here’s how a credit builder loan works in a few short steps: __
- You apply for and open a credit builder loan at a bank, credit union, or online or via mobile app through Self.
- Once your application is approved, the bank moves your loan proceeds into a separate account, which stays locked until you pay off the account.
- You then begin making monthly payments for a predetermined amount of time. These loan terms can be as short as six months or as long as several years, depending on the lender. Once you pay off the loan in full, the account unlocks and the money you paid, minus interest, is returned to you.
3 - Apply for a secured credit card
A secured credit card works the same as a regular credit card, with just one difference – a secured card requires a refundable security deposit. This deposit can be as low as $200 and is usually equal to your credit limit
, which is the total amount of credit you can use on the card.
Again, since you do not have an established credit history in the U.S., the card issuer holds onto this security deposit in case you do not pay back what you owe. As you use the card responsibly, and pay what you owe on time each month, a secured credit card can help improve your credit score and add more positive information to your credit report.
This type of card is different from a debit card, which does not report to the credit bureaus and does not involve a billing cycle.
Once you no longer need the card, you can cancel it and get your security deposit back. After establishing positive credit over several months, some credit card issuers will offer you the choice to either raise your credit limit or upgrade to a regular, unsecured credit card and refund your original deposit.
For more on how secured cards could help you build credit, check out this blog post, “Use Secured Cards to Build Credit.”
4 - Get a cosigner
Unlike secured cards and credit builder loans, which are widely available, getting a cosigner on a loan or becoming an authorized user (we will get to that in a minute) depends on having a close relative who has already established credit in the States. There are some differences between the two options, though.
is typically used if a borrower is unable to qualify for a loan on his or her own. By having an additional person who already has credit in the U.S. on the loan, it helps reduce the risk for the lender. This makes a lender more likely to extend the loan to you and give you a more competitive interest rate. As you pay back the loan, you build credit history.
Whenever someone cosigns on a loan, they are agreeing to accept full legal and financial responsibility for the borrower’s debt if the borrower does not pay.
Cosigning is especially common between parents and children, as well as spouses, though other close relatives or friends could also cosign with you. Just like with being an authorized user however, your payment history on the loan could – for better or worse – impact your cosigner’s credit too.
Jorge Vivanco is a Compliance Manager at Self. He immigrated to the U.S. from Mexico in 2009.
“In Mexico, applying for credit is not a common topic that you discuss with your family or friends. If you want something but you don’t have enough money, you save until you have enough. We try to stay away from debt,” Vivanco says.
However, once he moved to the U.S., he needed to purchase a car to have reliable transportation for getting to work. To get that car, he needed credit.
“I went to a car dealership, and after learning the requirements I needed to get a car, I asked my aunt if she could be a cosigner since I did not have any credit history at all,” Vivanco says.
After one year of making payments on his car on time and in full, Vivanco was able to apply for – and receive – a credit card and continue to build credit on his own.
Learn more about cosigning by reading the post “How Cosigning Affects Your Credit.”
5 - Become an authorized user
An authorized user
is a person who is authorized to make charges to someone else’s credit card account. The original person who applied for a credit card and was approved is considered the primary account holder, and he or she is able to add authorized users to the account, usually at no extra cost.
This allows a parent, spouse, or close relative to help their loved one gain access to credit and start building credit history. The authorized user does not even have to use the card once they are added.
However, before you are added as an authorized user, make sure the person adding you has great credit, makes their payments on time and does not use too much of their available credit. Both adding and becoming an authorized user can be a risk, since you are essentially trusting someone else with your credit, and their credit behavior can either help or hurt your own credit.
What to watch out for when building American credit
Now that we have covered some of the more basic ways to build credit, here are a few things to be aware of as you start to navigate the American credit system.
1 - Watch out for payday loans
In the case of payday loans, the name “payday” can be misleading. Even though these are short-term loans, these loans can take weeks, if not months or sometimes years, to pay off. Their interest rates can be as high as 400% or more. While most personal loans charge interest, typical rates range from about 6% to 36%
, which is much lower than a payday loan rate.
In addition to being expensive, payday loans do not report your payment history to the credit bureaus, and do not help you build credit.
2 - Be aware of any interest rates or fees involved
Before signing up for any type of credit, whether it is a personal loan, auto loan, credit card, etc., make sure you read the terms and understand what interest rates and fees are charged. Legally, you have a right to this information before you sign anything, so if you do not see it, ask.
could include anything from fees for late payments to annual fees and other charges.
, a term which can have negative connotations in some cultures, is actually an essential term to understand in order to navigate the American financial system. Here, interest is basically how lenders cover the risk of extending you credit, which could come in the form of defaulted loans or unpaid credit cards.
When it comes to interest rates, one of the best ways to comparison shop for costs is to look at the Annual Percentage Rate (APR). There is a slight difference between how this interest is charged in personal loans versus on credit cards.
__Interest rates on credit cards __
When it comes to credit cards, the interest fee is basically in place so the credit card provider can protect themselves from risk if you do not pay off the full amount on your card each month. However, the interest rate (APR) only gets added to your credit card bill if you do not pay off your balance (what you put on the card) in full each month.
For example, if you put $100 worth of charges on the card and you only pay $30 back that month, you will be charged interest on whatever is left. If you make your payments on time and in full each month, you can avoid interest on credit cards.
__Interest rates on loans __
Personal loans are another matter. Unlike credit cards, which only accrue interest if you do not pay the full amount, most personal loans include interest with every payment. The interest rate you are charged usually depends on your credit score, but for most loans the APR ranges from 6% to 36%.
As with credit cards, this rate reduces the risk taken on by the lender and is part of the cost of doing business.
3 - Understand the role of making payments in building credit
In the U.S., payment history counts for 35% of your credit score, and is the biggest factor in helping you build credit. Your payment history looks at whether or not you make your payments on time. Typically, the better your payment history, the better your credit.
To build positive credit then, make sure you know when all your payments are due, and consider setting up automatic payments or payment reminders so you never miss a payment. Even just one late or missed payment
could stay on your credit report for up to seven years.
There are many obstacles that new immigrants have to overcome in the States – adapting to new cultures, new jobs, new languages, new laws, new financial systems. Not to mention the sheer amount of paperwork involved. While the adjustment is far from easy, with the right tools and knowledge, you can make the financial part of it, at least, a little less confusing and a little smoother.
Welcome to your new life in a new country, friends.
About the author
Lauren Bringle is an Accredited Financial Counselor® and Content Marketing Manager with Self Financial
– a financial technology company with a mission to help people build credit and savings.