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