Credit history: Expats guide on building credit history in America

I have an awesome credit history in Australia. With property & stock investments behind my name over a number of good years and credit cards with limits I’d never hit you’d think I have it easy on the credit history front in America. I mean America and Australia already have a tax treaty which stops me from getting taxed twice and includes nice tax breaks for all Aussie ex-pats.

Well that’s where things change. American financial institutions, and uncle Bob, don’t care about your good credit history in Australia. They say you have to start from scratch here and prove to them you are capable of managing your money on the American soil. If you intend to stay in America for only a few years to earn some cash and go back home then getting credit history in America will not be your priority. However if you think there is a slight chance you may stay I recommend you get familiar with how credit works in America… so read on.

How does credit work in America

So let’s look at this:

  • You start with 0 credit score in the USA.
  • Your prior credit history in Australia means nothing, even if you are a good investor.
  • 0 credit score means you can’t get a car loan (sort of, I will explain this later), a credit card (there is a way though which I will explain later), buy anything which requires bank’s leverage (money) like a house, car, shares etc…

In the U.S. credit scores are broken down into 5 categories each contributing to a percentage of your credit score:

35% – Payment History: This is whether you have paid on time or not
30% – Debt To Credit Limit Ratio: This is your total debt compared to your total credit limit
15% – Length Of Credit History: This is how long you have had credit
10% – Types Of Credit Accounts: This is the different types of credit you have
10% – Inquiries (hard): This is when a creditor checks your credit report

Most important factors in your credit score:

  • Whether you pay your bills on time and
  • How much of your available credit you actually use.

Credit score

As I mentioned above you start with 0 credit score. Once you start building credit history your score will increase.

The range:

  • Credit scores range from 300-850, with 723 being the medium FICO score of Americans.
  • Scores below 600 are considered high risk borrowers,
  • 620 being the dividing line between good and bad,
  • 640 or above being “pretty good”,
  • 650 as average general credit-use behavior, and
  • above 690 or 720 being excellent

More on credit score can be located here.

Building a super-duper credit score

  • Since best method is to get a car loan. Even if you don’t need a loan get one at least for 50% of the vehicle’s value. Make sure it’s not lower than $5K. This is what I did with my wife. It was tricky because no financial institute will give you a “car loan” since you have no credit history but you need credit history to get a car loan. A chicken or egg scenario. However there is a way! I found this small hole the hard way and will explain it in my next post on purchasing a car using a loan.
  • Get a secured credit card. Note, a “secured” credit card not an unsecured one. No one will give you an unsecured credit card. With a secured credit card you pay the institute (bank) a sum of money ($2K in my case) and they use that as security for your $2K limit credit card. You do get this money back once they approve you for an unsecured credit card but for now budget around $2K out-of-pocket. An unsecured one is your typical bank credit card where you use the banks money. This means you will need to recharge (pay credit card dept) on your money every month. Remember you are “proving” to your bank you can pay off the “dept” in a reasonable amount of time and know how to handle it. You will be able to convert to a regular, unsecured credit card after 12 to 18 months of on-time payments.
  • Do not max out any of your credit cards, or even get close. Keeping your credit use to less than 30% of your credit limits (10% is better) will help you get the best possible credit score – and should help keep you from getting over your head in debt, as well.
  • Pay utilities (power, gas & electricity) and property rental in your name and set up automatic payments or reminder systems so that you’re never, ever late. All it takes is a single missed payment to trash your credit scores – and it can take seven years for the effects to completely disappear.
  • Get a store card like Macy’s Credit Card. Macy’s is one of America’s largest chain of mid-to-high range department stores. Department stores like Macy use finance companies, rather than major banks, to handle the transactions. These cards don’t do as much for your credit scores as a bank card (Visa, MasterCard, Discover, etc.), but they’re usually easier to get. Again, don’t go overboard. One or two of these cards is enough.

Your credit score

Finally, you’re also entitled to a free annual look at your reports from AnnualCreditReport.com or CreditSesame.com. This is known as a “soft inquiry” (thanks Brian P. Hamachek). It is ok to use these systems to frequently check your credit score since they are not recorded on your credit report. Hard inquiries (when buying a house or car) remain on your credit report for 24 months and an impact for only first 12 months. A good rule of thumb is to only apply for credit when you really need it.

CreditSesame is a nice free online tool which also advises you how to improve your credit score and show you what causes it to fluctuate. I use this one regularly.

I believe I covered most of what’s needed (stuff I did and am doing) but if you know of more stuff I can do or have missed here feel free to share it in the comments section below.

Update Sep 10, 2011 – Thanks to Brian P. Hamachek and Philip Tellis for contributing to this post in the comments sections below. Some updates were made to the body of this post. You guys rock!

Here’s to building a fantastic credit history in America.

Ernest

Build credit history superfast – get a car loan

Yes it’s true. If you want to build credit history in America you should consider getting a car loan. There is no better or faster way to building credit history then through a car loan. Here’s why.

Why a car loan?

Remember my last post on building credit history? If not then click here to read about building credit history in America. In a nutshell, getting a car loan is the BEST way to quickly building your credit history. You need to have a listing on your credit history that you are capable of paying off a sustainable large dept, like a car loan. This loan must be no smaller than $5K.

Get a loan from Technology Credit Union (TechCU)

TechCU were the only folks who would even consider giving me a car loan. And remember I came to America with 0 credit history. TechCU caters for technology folks in Silicon Valley with no credit history. The downside is you will be on a higher interest rate – around 15%.

No big American bank will lend you money on good rates because you are a liability, someone without credit history. I have a personal account with Wells Fargo Bank (one of the largest in the US) with plenty of money in it sitting in a special high yield checking & savings account and they they still thought I was a liability when I wanted to get a loan through them. Again, because I had no credit history.

Well Fargo would only give me a “secured loan” – a loan which was backed (locked up) with my own money. This is not good enough for me since:

  • it’s using my money and
  • it is not what the credit bureau considers a “car loan” – not good in building credit history.

Before you can get the loan approved by TechCU they will need from you:

  • Paper work from the dealer on the car you are purchasing inc. it’s Kelley Blue Book value. See my post of purchasing a car from a dealer located here.
  • See certificate of purchased for “car insurance”. Also the dealer won’t let you drive off the lot without one!,
  • See that you are a “software engineer” – basically you need to bring a letter from your company’s HR department showing your income and your position/title of a software engineer. The position/title is important since TechCU is for technology folks only.
  • A copy of your Californian Drivers license. Your International Drivers license will not do. It’s worthless. Read this post on getting your Californian Drivers license. All you need to do is pass the Theory exam to get your temporary drivers license number. But don’t forget to schedule your practical exam since your temporary drivers license expires in 3 months.

Sounds painful? it is! But it pays off in the end.

Links mentioned in this post

TechCU website: http://www.techcu.com/

Building credit history: http://www.theroadtosiliconvalley.com/finance/building-credit-history-america/

Let me know if you found a quicker way to get around this by posting in the comments below.

Ernest