Establishing Credit for Immigrants
When someone is new to the country, many times they are seeking their own personal American dream. This may include a lot of things, but often times, it involves home ownership. Immigrants legally living and working in the US can obtain financing through many of the same channels and with the same loan terms that US citizens have available, but one step that should be taken before applying for a loan is to establish credit, and achieve a good credit score. While many times people move to the US for work and may have strong income, assets to use for a down payment and closing costs, and a great payment history in their native country, there is still a huge barrier in the form of a lack of FICO score.
Generally, credit history doesn't transfer to the US credit bureaus (the 3 main ones being Experian, Equifax, and Transunion), so many times immigrants will have to start from scratch. Here are 10 ways that starting from scratch can be made less difficult, and using these methods will ensure someone not only obtains a credit score, but creates a FICO score that lenders view as excellent so that rates and terms are favorable to the borrower.
1) Act Quickly
Once an individual begins establishing credit through opening accounts, it can take 6 months or longer for the credit bureaus to register credit scores that lenders will use to determine eligibility for financing, so it's important that someone new to the country gets started as soon as possible so that when they need financing, they're able to get it.
2) Obtain a Social Security Number
While the social security administration won't give out a social security number simply for someone to establish credit, getting credit is much easier once a social security number is obtained. If an immigrant has been approved to legally work in the US through the Department of Homeland Security, they should apply for a social security number by filling out an application/form SS-5.
3) Have your rent reported
If you're renting or planning to rent a home, ask if your landlord or property management company participates with Experian's RentBureau program. This program will report your rental history to the credit bureau, helping to establish a credit score. If where you live doesn't participate, don't fret, there are more ways to establish credit with no history!
4) Obtain a secured credit card
A secured credit card is one of the best, and easiest ways for someone with no credit history to start building a credit profile. With a secured card, a borrower uses their own funds to create a balance which they can then borrow against. It is prudent to use the secured card, and then pay off most or all of the balance, building credit while avoiding interest.
It is important to make sure that when opening a secured card, the payment history will be reported to at least 2 (preferably all 3) credit bureaus. One can find options for a secured card through banks, or online - but keep in mind that cards come in all different terms, so it's important to shop for the right option, and read all of the terms of the secured card.
5) "Piggyback" off of someone else's credit
If you have a relative or spouse that has already established credit, it may be possible to become an authorized user or co-borrower on an account that they have in good standing. This can be an excellent way to build a great credit score quickly, but be careful - even as a coborrower/cosigner, a late payment made by the primary borrower will also count as a late payment against the coborrower/cosigner, so if you go this route, make sure the person you link up with is someone that has great credit & you can trust that their good payment history will continue.
6) Open different types of accounts
One factor in having a great credit score is what type of credit you have. For example, a borrower with multiple credit cards may have a good credit score, but a borrower with various types of credit will have a better chance at a higher credit score. While using secured cards is a great way to obtain a FICO score, once you have one and credit becomes more readily available, it may be a good idea to look into different types of loans - auto loans or a personal loan, for example, can further increase credit scores if paid on time.
7) Keep credit balances low/paid off
While it's important to use credit to build a credit score, it's just as important to pay it on time and keep balances low or at $0. Credit scores are partially based on what's known as "credit availability", and the more available credit you have, the better. For example, if 2 people have a $1000 credit limit, and one of them carries a balance of $900 and the other carries a balance of $100, the person with the lower balance will have a better FICO score. A good rule is to at least keep balances lower than 50% of credit limits, but a better strategy is to keep balances at less than 25% of a credit limit to really give credit scores a boost.
8) Limit the number of open accounts
When building credit, every point counts. If too many accounts are opened in too short a time period, credit inquiries (the times lenders look into your credit) can reflect poorly on your credit scores. It's vital to open new accounts, but no more than 3-4 accounts are needed to build a near-perfect FICO score.
9) Think long-term
When trying to open accounts, seek out accounts that you'll want for the long haul. "Seasoning", or the length of time an account has been open, is another factor in credit scoring. New accounts don't help credit scores as much as old ones, so holding onto your credit accounts, even with $0 balances, is a great way to maximize credit scores.
10) Guard your personal info
When obtaining credit, you want to be sure you limit your vulnerability to fraudsters -identity thieves and people that will use your credit for misdeeds. Keep all of your personal information in a safe place, safely dispose of any account materials, and never freely give out your social security number or account information. It's not a quick, fun, or easy process to build a great credit history, and your information falling into the wrong hands can ruin all of your hard work almost overnight!
By following these steps, you'll be on the right path to great credit, low rates, and friendly lending terms. If you're an immigrant, once you've got a social security number and a FICO score, you'll enjoy the same lending process as citizens, and the dream of home ownership will be yours for the taking! When that time comes, reach out to a mortgage lender that will guide you through the process until you get the keys to your new home!