Credit & Debt
Immigrants Build Credit Histories from Scratch
For Some, the Concept of Credit Reporting is Brand New
When Vishnu Bethalem, 38, arrived in Phoenix from his native India 10 years ago to start a new life and career as an IT engineer, the concept of credit was as new to him as the Arizona desert. In India, he recalls, most purchases were with personal checks or cash, and banks issued loans based mainly on employment history and income. “I knew nothing about building a credit history and a credit score," he says.
But Bethalem quickly discovered the challenges of living in the United States without credit. To get a cell phone, he had to rely on a friend to put him on a family plan, and renting an apartment meant finding a landlord willing to accept a letter from his employer and two months' advance rent in lieu of a credit check. Indeed, no matter what your plans entail, “credit plays a big role in your future and has tremendous impact on your ability to achieve life's milestones," says Florian Egg-Krings, general manager of Chase Slate.
Your credit history includes a record of your repayment of debt, which is tracked by the three major credit bureaus, Experian, Equifax, and TransUnion. Your creditworthiness can affect whether you get a loan and the interest you'll pay, and it can even affect your employment prospects and your ability to start a business. “Potential lenders look at your credit score to determine whether you're likely to repay the loan and whether they're comfortable making it," says Josh Palmer, CFP®, head of the wealth advisory team for Chase Wealth Management.
Building a credit history
“The best way to build credit is to start small and work toward a larger goal," says Bruce McClary, vice president of the National Foundation for Credit Counseling, a nonprofit organization. First, consider applying for a secured credit card from a reputable financial institution. Unlike ordinary credit cards, these require a deposit as collateral. Your payments are reported to the credit bureaus, and with a solid repayment history, generally after a year or two, you can graduate to unsecured credit cards, which can offer lower interest rates.
You may also want to open one or two credit cards available from department stores or gasoline stations. These often have higher interest rates but may not require a credit history, and steady repayment can help you establish a good credit record. But be selective. “Applying for a dozen credit cards at the same time will have a negative impact on your credit score," says McClary.
Opening a savings and/or checking account at an established bank can be another plus, says Palmer. Although activity on these accounts usually won't be reported to the three major credit bureaus that calculate your credit score, you'll be establishing a long-term relationship with the bank that may be valuable if you apply for a loan or credit card in the future.
With a new credit card, McClary says, using it is the key to building up your credit. “You'll want to show consecutive payment activity for a few billing cycles, which will get your score off to a stronger start." When you can, pay off the balance each month to avoid paying interest charges. Most importantly, don't miss any payments, because doing that could drop your credit score by 100 points or more. Pay other bills on time as well.
There are no shortcuts to establishing credit, so beware of any companies that offer to raise your score instantly, McClary advises. But if you spend responsibly and pay back promptly, you should soon find yourself with a credit score enabling you to pursue your financial goals. Once you've got the score you need, stay aware of it on an ongoing basis, Egg-Krings suggests. “Checking your score and working to build and maintain healthy credit can help you build assets and increase your personal worth, putting those dreams and goals closer within reach."
(Visit Chase Slate to better understand your credit health.)
After two years in the United States, Vishnu Bethalem had built a solid credit score, which allowed him to lower the interest rate on his car loan and obtain a mortgage with favorable terms. Says Bethalem, “In the United States, you need a credit history to be able to live the life you want."
Photo: Hero Images/Getty Images | Anita Slomski is a freelance financial journalist living in the Chicago area.