Immigrant’s guide to building credit in the U.S.

Each year the U.S. welcomes more than a million immigrants, reports the Pew Research Center. If you are among them, odds are no one presented you with a handbook explaining how to become creditworthy. Nor is the process intuitive. Figuring it out as you go along can result in costly errors, missed opportunities and considerable frustration. You may ask your friends and family members about credit for immigrants but they may not know either. Bad advice can be worse than no advice.

To begin on the right foot, here’s what you need to know about building credit and borrowing from lenders in the U.S.

Why it’s important to establish U.S. credit quickly

Understanding the credit system is vital to building a better life in the U.S., says Raghunandan G, founder of Zolve, a platform that helps people apply for U.S. bank accounts and credit cards while still in their home countries.

“Good credit is essential,” says G, who was born in India. “However, most immigrants only realize the value of this well into their time in the U.S. They have to depend on cash to manage most of their big-ticket expenses, while most of their American counterparts manage these expenses on credit cards. Immigrants do not receive any reward points for these expenses as well.”

Unfamiliarity leads to steep learning curves, says Maria Gaitan, community impact liaison for Consolidated Credit, a nonprofit credit and housing counseling agency.

“For example, a lot of Latin and Hispanic people may not have grown up with that culture, and then ‘oops,’ they’ve made a bunch of mistakes,” says Gaitan. “That’s what happened to me. I came to the U.S. from Nicaragua when I was 18, where we didn’t have a credit reporting system. All I had was a suitcase and $500. I got a couple credit cards and immediately maxed them out. I couldn’t pay and that hurt my credit for years.”

Establishing credit also helps you avoid turning to high-interest loans when cash is tight. Payday loans, for example, are based on personal checks held for future deposit, not your credit status. However, a $100 loan can cost $15 for 10 days, which equals an annual percentage rate (APR) of nearly 400%. You won’t build credit and there are no rewards for usage. Credit cards for immigrants are better, since they carry average APRs of around 16 percent.

Step 1: Learn how consumer credit agencies work

Credit reports begin automatically when you start to borrow from lenders, which will send your activity to the three national consumer credit reporting bureaus (also called agencies): TransUnion, Equifax and Experian. The credit agencies’ role is to create constantly updated reports on how you’ve been managing credit products and debt. Although they are regulated by federal law – the Fair Credit Reporting Act – they are separate, private companies.

Credit reports (sometimes called credit files) give lenders and other companies the information they need to make objective business decisions.

You have a right to obtain your credit reports, and the best way is through AnnualCreditReport.com. Ordinarily, you can receive one report from each bureau for free once a year. During the pandemic, you can access each report once a week.

Credit reports contain the following information:

• Personal identifiers. Your full name, date of birth, SSN or ITIN and your address for the past two years.
• Trade lines. This is where any credit accounts will be listed, along with the date you opened the account, your last reported balance and your payment history will appear. If you skipped a billing cycle, a 30-day late mark will be noted. Miss another and it will show a 60-day late mark, and so on. If you do not pay at all, a collection agency may purchase the account and that company’s name will appear on your report.
• Public records. If you discharge debt in bankruptcy court, the date you filed and the type of bankruptcy you used will be noted.
• Inquiries. Lenders will notify the credit bureaus when you apply for credit products and each will show up as a hard inquiry. Banks and other businesses can check your credit without you applying and those reviews will show up as soft inquiries.

It is your right and responsibility to monitor your consumer credit reports. All the information listed should be accurate and timely.  Reviewing your reports will give you the opportunity to file a dispute if you do spot any errors. This way you can guarantee that your credit file is reflective of your true creditworthiness.

Step 2: Understand how credit scores are calculated

Credit reports can be long and complicated documents, so credit scores make everything much easier for lenders. Credit scoring companies such as FICO and VantageScore developed mathematical models that predict lending risk. Everything except your personal identifiers is used in the calculation.

Credit scores range from 300 to 850. Higher numbers are preferable (with 670 and above considered good to exceptional) because they indicate less lending risk. Each credit scoring system has its own mathematical model, but they share many similarities.

The most commonly used is the FICO Score, which takes the following into account:

• 35% payment history: The most important thing you can do for your score is to make all your payments on time.
• 30% credit utilization: Paying credit card bills to zero – or keeping the balances very low as compared to the credit limit – is very important.
• 15% length of credit history: The longer you have had and used credit products, the better for your score.
• 10% credit mix: Having a variety of credit products, such as loans and credit cards, has an influence on your score.
• 10% new credit: Keep credit applications to a minimum. If you pursue many accounts within a short span of time it can give the impression you are having money troubles.

A FICO score will be developed after at least one account is on your file for six months. VantageScores can be generated with one account after two months. Creating a high credit score can take years, but if you follow the rules, you’ll get there.

Of course, credit problems can arise, but you can recover from mistakes by taking action. “There are always ways to get on the right track,” Gaitan says. “Just start sending all payments on time again, and reduce any revolving debt so it’s well under the credit limit.”

Step 3: Establish credit by borrowing and repaying

Since qualifying for unsecured loans and credit cards is largely dependent on your credit reports and scores (you’ll also need an income), it can be challenging to get them without an established credit history.

“Being a credit-driven economy, immigrants in the U.S. are faced with a typical chicken and egg problem,” says G. “To get access to good credit products, one needs to have a good credit score. And conversely, to build a good credit score, one needs to have access to credit products.”

Credit cards for new residents are available but for Jorge Vivanco, a compliance manager at Self Financial who came to the U.S. from Mexico when he was 17, misinformation about how to get one was frustrating.

“I was told to go and apply for a credit card at BestBuy and buy a TV or laptop,” says Vivanco. “To my surprise, my credit card application was denied due to not having any credit history. During that time, my question always was: How am I supposed to build credit if you’re not giving me credit?”

Here are a few good ways in:

Put down a deposit for a secured credit card

With a secured credit card, you put down a cash deposit that guarantees the credit line. The issuer would then grant you an account you can use the same way as an unsecured credit card. Some issuers will convert secured cards into unsecured cards after you’ve handled the card well for a certain number of months, and the security deposit will be returned to you.

Apply for a low-limit unsecured credit card

It’s possible to get an unsecured credit card with a small limit that grows with responsible use. Nicola Devilla, a talent acquisition recruiter, came to the U.S from Belgium at the age of 26. “I found out that no credit history was worse than bad credit because I was a blank slate,” says Devilla, who applied for several credit cards and was turned down. “Then I got a mailer from Discover for a small limit card and I got it! They increased the line every few months and now it’s around $20,000.”

Take out a credit builder loan

Credit unions, which are nonprofit financial institutions, offer their members credit builder loans, though a few banks and online lenders do as well. You would borrow a small amount – typically $1,000 or less – and repay it over the course of six to 24 months. The money you borrow is deposited into an interest-bearing savings account or certificate of deposit. After the loan is repaid, you get the money plus a positive credit history.

Get a cosigner

If you know someone with good credit who is willing to cosign on a loan, you can jumpstart your credit. That’s what Vivanco did, when he wanted to finance a car without a credit history. “Luckily, my aunt, who had been living in the U.S. for ten years, became the cosigner and I was approved,” he says. “If it hadn’t been for her, it would have taken much more time to establish a good credit history.” If you use this method, be very careful to send your payments on time. The account will show up on both of your credit reports, so delinquencies will affect you and the cosigner.

Become an authorized user

Another way to add information to your credit file is to be added to someone else’s credit card as an authorized user. You will then have a card with your name on it and can make charges, but aren’t responsible for the payments. The credit card will show up on your credit report, so as long as the primary account holder treats it well, it can enhance your credit score.

Bottom line

As more positive activity is recorded on your credit file, your credit scores will rise. Eventually you will be eligible for low-interest loans and credit cards that enable you to earn rewards such as cash, points and miles as you charge, as well as providing you with a range of consumer benefits and valuable perks.