How to build credit history in the U.S.

Like many other immigrants, when Ana Staples moved to the U.S. from her native Russia 11 years ago, she was unfamiliar with concepts like credit score or credit history. She didn’t know how important building credit was to move ahead in her new country. “My road was built on many mistakes,” says Staples, a credit card expert who writes for Bankrate, a website that offers personal finance advice. “I did not know how credit cards worked. Where I’m from, they’re not as common as they’re here.”

Unaware of the potential consequences, Staples racked up credit card debt and even missed payments on her card bill, two of the worst mishaps that can tank your credit score. Those early mistakes held her back financially for years. When she tried to buy her first car, “I had to go to one of those lenders who work with people with bad credit scores, and they gave me a loan and everything, but the interest rate was insane,” Staples says.

Little by little, she educated herself on how to use credit to make financial progress. This included reigning in her spending and using credit cards responsibly. Today, Staples has excellent credit, just finished paying off her second car loan and bought her first house —an apartment in Downtown Seattle. Thanks to her credit, savings and an assistance program for first-time buyers, she was able to secure a mortgage with a very low down payment.

In this guide, Staples and other experts in America’s credit score system will explain how credit scores work, the dos and don’ts of credit building and the steps you can follow to achieve the ultimate American Dream of buying your first home. Spoiler alert: It’s all about patience and financial discipline.

WHY CREDIT SCORES AND CREDIT HISTORY ARE KEY TO FINANCIAL SUCCESS IN THE US

“In the American system credit gives people the opportunity for upward mobility,” says Barbara Mojica, executive director of the National Association of Credit Union Professionals (NLCUP). “Credit scores determine whether or not you will have access to financial opportunities,” adds Yanely Espinal, a Brooklyn-born personal finance influencer of Dominican descent, better known in social media as @MissBeHelpful.

Some of these opportunities might seem obvious, like getting a loan to open a new business or to buy a car or a house —but credit’s impact on everyday life doesn’t stop there. “Your credit is checked in so many other instances,” says Staples. “For instance, when you come to the U.S. and need to rent your first apartment, your credit most likely will be checked. And if you don’t have a credit history yet or if your credit score is just not perfect, they might not deny you [the apartment], but they might require a much higher deposit.”

“In our countries, specifically talking about Latin America, we don’t have as much trust with credit unions or banks because of the things that happened in those countries,” says Mojica. “But here it is super important to start building credit almost immediately.” Without established credit, “you may be denied financial opportunities or be required to pay in full with your own cash,” adds Espinal.

CREDIT REPORT AND CREDIT SCORE: WHAT THEY ARE, HOW THEY WORK

A credit profile is made of two basic components: a credit report and a credit score. The goal of the entire credit system is to build trust between you and the U.S. financial institutions, so when you want to borrow money from them, they have evidence or reasons to trust that you’ll pay them back.

“A credit report is like a long receipt of every time you borrowed or owed money and made or missed payments,” Espinal explains. Making payments on time and consistently builds good credit —but making late payments, or missing them altogether, can ruin it.

“If you lend money to a friend and they don’t pay you back, ask yourself whether you would be willing to lend that friend money again in the future,” Espinal says. “Probably not! In your eyes, that friend is not creditworthy.”

Any payment activity related to a loan or a tradeline is reflected on your credit report and is used  “to calculate your score, which represents your creditworthiness,” explains Espinal.

The American financial system largely relies on two major credit score models: FICO and VantageScore. FICO was the first score on the market and is used by most lenders to evaluate consumers’ creditworthiness and assess their credit risk. VantageScore appeared later but has gained popularity in recent years. Many banks and other financial institutions offer free access to either credit score as a benefit to their members.

Both score formulas range from 300 to 850 points. The higher your score, the wider and better the financial opportunities you may have access to —including lower interest rates.

According to Experian —one of the three most important credit bureaus in the country, in addition to Equifax and TransUnion— these are FICO’s credit score ranges:

• Poor credit: 300 to 579 points
• Fair credit: 580 to 669 points
• Good credit: 670 to 739 points
• Very good credit: 740 to 799 points
• Excellent credit: 800 to 850 points

Sixty-seven percent of Americans have a good FICO score or better, according to Experian. And while the best financial opportunities and interest rates are reserved for consumers with good credit, it’s possible to get approved for a mortgage with a score as low as 500 points.

FIVE FACTORS THAT AFFECT YOUR CREDIT SCORE

• These are the five factors that FICO takes into account to calculate your score, and how much each weighs on credit score calculations.
• Payment history: Represents 35% of your score and is the most important factor in credit scoring calculations. Making on-time payments helps improve your score, while making late payments, or having missing payments or accounts sent to collections, can hurt your score severely.
• Credit utilization ratio: Accounts for 30% of your score and is the second most important factor. It considers the balances you have on your credit accounts, how much you owe and what percentage of your credit limit you’re using on revolving accounts.
• Length of credit history: It’s 15% of your score. It calculates the average age of all your credit accounts, along with the age of your oldest and newest accounts. Having 15 years of credit history is better than only two years.
• Credit mix: It represents 10% and considers whether you’re handling both installment accounts —such as a car loan— and revolving accounts, like a credit card. Showing that you can manage both types of accounts responsibly is generally good for your score.
• New credit: It’s also 10%. This factor considers whether you’ve recently applied or opened new credit accounts. Opening or applying for multiple credit accounts in a short period of time can hurt your credit —lenders might see it as a red flag.

STRATEGIES TO BUILD CREDIT

These are some tips offered by personal finance experts you can follow to establish and improve your credit profile.

Get an official taxpayer number

It can be a Social Security number (SSN) or an Individual Taxpayer Identification Number (ITIN), which doesn’t require a visa or any other immigration document for approval. Either number is usually all you need to open a checking account or apply for certain types of loans.

Open a checking account with a US bank

“The way a lot of people approach it is to get a checking account first,” says Staples. It’s an easy way to create a relationship with a bank or a card issuer.

Mojica suggests exploring options through credit unions. These nonprofit financial institutions “are usually very well equipped to serve the undocumented or immigrant community,” she says. Many banks and credit unions only require an ITIN to open an account.

Apply for a secured credit card

You don’t need a good credit score, or even credit history, to open a secured credit card.

“You give them the money as a deposit [as little as $200], which becomes your credit limit and you can use the card normally for purchases to build your credit score from scratch,” explains Espinal.

After a few months of responsible use, many banks can “graduate” your secured card to a traditional, unsecured credit card. You get your deposit back and you keep building credit.

Keep a low credit utilization ratio

The key to improving your credit with a secured card is to use the card strategically, explains Staples. She and Espinal suggest not to use more than 10% of your credit limit and pay your card balances in full every month.

“If your credit limit is $200 and you have a $20 balance, your credit utilization is 10%, which is good,” Staples says. “But if you have a $100 balance, that’s 50% of your available credit. It’s very high and can hurt your credit score.”

Espinal recommends paying just one bill with your card each month and “always try to pay off the balance in full and on time.” Many banks let you set up automatic payments on your card bill, she explains, which can help you ensure to always pay on time.

Become an authorized user on somebody else’s credit card

If you’re not ready to apply for a secured credit card on your own, you can ask a relative or friend who has good credit to add you as an authorized user on one of their credit cards.

Any activity on that card account will be reflected on your credit report. But it’s crucial that the person adding you as an authorized user has good credit and a habit of making on-time payments —otherwise, it can do more harm than good. “Their positive payment history can help boost your credit score,” says Espinal.

Apply for a credit builder loan

This type of loan is specifically designed to help build or boost credit. It’s similar to a secured credit card.

“You make small monthly payments, and the lender reports your payments to the credit bureaus to help build payment history,” Espinal explains. “At the end of the loan, you get your money back minus a fee.”

Always pay your bills on time

“The worst mistake you can make is to have a late payment,” Staples says. “A late payment stays on your credit report for seven years, and it’s even worse if you keep missing payments and then your account may go into default.”

A single missed payment can tank your credit score for years. If you need to apply for a new loan down the road —like a new credit card or a mortgage— a potential lender might see it on your report and say, “See, there is a 120 day delinquency and the account was settled or sold to collections,” Staples says. “That’s a huge red flag” that might lead to a loan decline.

Use your income, and your credit cards, responsibly

“You need to be very disciplined with your credit card,” Staples says. “Don’t treat your card like it’s free money. Don’t buy everything you want just because you have credit.”

Mojica advocates for not living beyond your means. “Look at your income and your steady bills and see how much more you can afford. And you might not have a big couch today, but you can have it in six months when you pay off your car, for example. Don’t try to do all these things all at once just because you have good credit.”

Use new credit lines wisely

Once you’ve learned to use your first credit card responsibly, it’s important to add other types of loans to your credit report.

“In a lot of places in the United States you can’t really move around without a vehicle, so a car loan would be a very natural next step,” Staples says. “By then you will have good credit, so it will be easier to get approved with a lower interest rate.”

Be consistent and have patience when it comes to credit

“When it comes to credit building, I don’t think it’s an easy step-by-step thing. It’s a multitude of factors and behaviors and habits that you do to build a good credit report,” says Mojica. “Don’t rush the process because that’s where I see a lot of mishaps. People get into too much debt, and then they can’t pay and the credit goes bad.”

Having a strong credit report can take one to two years, Mojica explains. “It’s not going to be like, I get a credit card and then in 30 days I’ll have a good report. It takes time.”

—

The production and publication of this story by La Raza have been made possible in part thanks to a grant from The Chicago Community Trust through its Cross Community Impact grant program.