How to Establish Credit for the First Time
What is Credit?
Credit is the ability of an individual or organization to obtain goods or services before payment, based on an agreement to pay later. Based on your promise to make payments later, it enables you to obtain the goods you need right away, such as a credit card or a loan for a car. Working to raise your credit score increases the likelihood that you'll be approved for loans in the future.
Steps to establish credit
1. Open a checking and savings account.
If you haven’t yet, form a relationship with a financial institution by opening a checking and savings account. This shows stability. There are many choices, from major banks (such as Bank of America and Chase), to regional and smaller banks as well as credit unions. All are fine, but before deciding on one, review a few. You’ll want excellent customer service, low fees and plenty of accessible ATMs so you don’t have to pay extra to use another bank’s machine. Once you have opened the accounts, contribute money to your savings and be careful not to overdraw your checking account
2. Familiarize yourself with consumer credit reports and credit scores.
There are three major credit reporting agencies in the U.S. – TransUnion, Experian and Equifax. Creditors and other entities send them information about your credit and debt activity, and the agencies compile that information into credit reports. Other businesses, when you apply for credit or a loan, will access these credit reports to understand what kind of borrower you have been. Credit scoring companies, such as FICO and VantageScore, take the data from these reports and turn it into scores, which range from 300 to 850. Higher numbers indicate less lending risk. To create top scores, you’ll need to pay multiple accounts on time and in full over many years.
3. Apply for a secured credit card.
Because you haven’t had a credit product yet, you don’t have anything on a credit report or a credit score. That makes businesses reluctant to lend you money. However, you can minimize that risk by offering collateral. With a secured credit card, you deposit a set amount of money (tap your savings account for the funds!), and the issuer grants you a credit card with a spending limit that’s usually equal to that deposit. If you rack up a debt and don’t pay, the issuer can claim what you owe from the cash you put down as collateral. Check out a wide variety of secured credit cards and select one that you like. If you have the money for a deposit and a steady income, you should be approved.
NOTE: One of our nurses was able to secure a Discover card with no credit history!!
4. Use the secured account perfectly.
Now it’s time to fill your credit reports with positive information! The easiest way to do this is to choose a regular expense to charge every month. It should be low enough so the balance on your card is never high. For example, if you can spend up to $500, never charge more than $100. Set up your checking account so the credit card bill is automatically and completely paid each month before the due date. For credit scores, timely payments and low or no debt matter most, and with this system you’ll ensure both. Because you won’t be carrying a balance from month to month, you won’t pay any interest. This is important because the interest rates on secured cards tend to be higher than those for unsecured cards.
5. Add another credit product.
After six months, your credit record will be lengthy enough that it will generate a FICO score. Having a credit score and credit reports populated with positive information will give other credit issuers confidence in your abilities to repay them. Open another credit card, this time an unsecured card, and use it as responsibly as with your first card. Some secured card issuers will let you take your deposit back and transition the account into an unsecured product. If so, take advantage of that, but redeposit that money into your savings account. That will be your security against financial emergencies.
5 Best Credit Cards for New US Immigrants
Not all credit cards are created equal. Credit card companies are competing for your business, and therefore offer different sets of perks that may appeal to you. Some may be more in line with how you plan on spending your money than others.
With the CapitalOne Secured Mastercard, you could get a $200 line of credit for as little as $49, $99, or $200. As you use your card responsibly, you open yourself up to qualifying for a credit limit upgrade in less than 6 months.
If you want to build credit while earning rewards — and not have to pay an annual fee in the meantime — consider the Discover it Secured Card. You can earn up to 2% cash back while pumping gas and eating out at restaurants.
The US Bank Secured Credit Card is the best card if you eventually want to move to an unsecured credit card. If you demonstrate a year of responsible use, you can request to upgrade to an unsecured credit card. This card has an annual fee of $29.
If you expect to carry your balance over sometimes, then you should opt for this special APR deal. This card has an APR that’s under 10%, which will make paying back the balance on your card easier if you find yourself strapped for cash.
The OpenSky credit card might be the best option for immigrants. Not only does it not require credit checks, but it also submits your credit report to the 3 major credit bureaus — great for building your credit!
All in all, there are tons of secured credit cards you can choose from to get on the path to building your credit in the United States. Look at all of your options and see which card best fits your needs.
Although it does not come with any rewards and has an annual fee of $35, our favorite secured credit card for immigrants is the OpenSky Secured Visa Credit Card. The card is easy to obtain and is effective for building your credit card reputation in the United States.