How to start a credit history from scratch

When I first arrived to the US as an international student, I didn’t have any credit history. This made renting an apartment really expensive. My then boyfriend (now husband) and I had to pay two months rent in advance, and also put down a two months security deposit. This also made getting loans impossible without a cosigner.

We spent a few years in the USA without any credit cards or loans. But, I knew the importance of building a strong credit history for our future in this country. I also knew I didn’t want to get into any credit card debt. So, I started researching ways we could build our credit history from scratch the smart way.

First card

I learned about secured and unsecured credit cards. Secured credit cards are cards that are backed by a cash deposit you make to the bank or credit card company. Credit cards that are unsecured don’t have any cash deposit backing it. This makes up the majority of the credit cards used in the US. It is also harder for people with no credit history to apply for unsecured credit cards and get approved for them.

I was initially going to apply for a secured credit card. But, I learned that people with no credit history have been getting approved for the Discover It Student Cash Back cards. This card gives 5% cash back in certain categories every 3 months, and 1% back on all other purchases. It also doesn’t have an annual fee. I took my chance and applied for the credit card. It was approved instantly with a small credit limit. If I wasn’t approved for this card, I would have applied for their secured credit card.

This was my first credit card. It’s also my oldest credit card, and I occasionally charge something to it to keep it active.

Building a strong credit history

Once you have your first credit card, it’s important to build a strong credit history, as this will impact your credit score. Most people are familiar with FICO, but there’s also VantageScore. Scores can range from 300 to 850. 600 and below are considered poor credit scores, while 700 and above are considered good scores.

The higher your credit score, the better you look to lenders, and the more options you have for loans with better interest rates. Because of my strong credit history, I was able to get a car loan with 0.9% interest rate. And having a strong credit history will help you when you are ready to apply for mortgages to buy a house, or when you need to refinance a loan.

There are several factors that affect your credit score:

  1. Your payment history
  2. Credit utilization
  3. Length of credit history
  4. Types of credit accounts
  5. Recent activities

The first two are the most important factors, and can make or break your credit score. I will go over each a bit more in detail below.

Payment history

You want to always make on time payments, because missing a single payment can negatively impact your credit score. FICO puts a 35% weight on the payment history. I set up all my credit card payments on autopay to pay of the statement balance, and I track these accounts in my budgeting software, Buckets, with the due date listed in the account names. That way, I know exactly how much we would need in our checking accounts to pay the credit cards on time and in full.

If you’re unable to pay your credit cards in full due to having more debt than you can pay off, you should at least put the minimum payment on autopay. But, remember that credit cards have high interest rates, which means your debt is compounding at an insane rate, and paying only the minimum payment will not help you reduce your credit card debt. That’s why I advocate paying your credit card statement in full, and we’re able to do that because we only buy what we have budgeted for.

Credit utilization

The second biggest factor in your credit score is credit utilization. This accounts for 30% of your credit score. Credit utilization is essentially how much of your total credit limit are you using. For example, if you have a credit limit of $1000, and you use $300 each and every single month, then you have a credit utilization of 30%.

It is recommended that you don’t use more than 30% of your available credit. Again, we pay off our credit cards in full each month, so our credit utilization is low. You can also increase your available credit by asking the credit card company for a credit increase, which will help lower your credit utilization. I did this about 6 months after I opened my first credit card by calling Discover and asking for a slight increase in the credit limit. Since I was paying off my card on time and in full, they were happy to increase it.

Over time, I applied for more credit cards to take advantage of signup bonuses, aka credit card churning and travel hacking, so my credit availability has increased significantly. Since we still don’t buy things on credit, our credit utilization is now very very low.

The other three factors

The length of your credit history accounts for 15% of your FICO score. That’s one reason I’ve kept my Discover It card and still use it to this day, as this is my oldest account.

Types of credit accounts affects 10% of your score. It’s essentially looking at how many different types of loans you have. This is one of the least important factors, as I was able to build a great credit history using only credit cards for several years.

Finally, recent activities such as opening new credit cards will affect 10% of your score. I’m not too worried about this when I do credit card churning, since it is such a small factor.

Other ways to build credit history

One way to build credit history is to become an authorized user on someone’s account. This is what I did for my husband on the Discover It card, as he didn’t have a social security number at the time. Over time, I’ve added him to other cards as authorized user. Now, he has an established credit card history without having to apply for credit cards.

If you rent, it might also be possible that your apartment management company reports your rental history. Therefore, on time rental payments are important. The same goes for utilities, as these can be reported as well.

For foreigners with credit history

If you’re a foreigner new to the country, you might be able to transfer your existing credit history from your home country to the US. For example, if you’ve used American Express cards before, you can take advantage of the American Express Global Transfer program. There is also Nova Credit, a global credit reporting company that translates foreign credit scores into US-based credit scores. This will accelerate your progress towards establishing a credit history.

How to check your credit history for free

I use Credit Karma to check my credit history and credit score for free. You are also entitled to one free credit report every 12 months from the 3 credit reporting companies: TransUnion, Equifax, and Experian. One strategy is to request a report from each company 4 months apart, so you have a rotating credit report every 4 months. Go to annual credit report to request your free credit report. Use it to spot identity theft early, to help you review old credit accounts, and help with apartment applications.

Final words

Building a strong credit history might feel impossible if you were like us, immigrants with no credit history. But it is entirely possible and not hard to do. Try a secured credit card, become someone’s authorized user, or transfer your existing credit history from another country. Make on time payments, and try your best not to incur credit card debt. It takes time, but you will be able to build a strong credit score. And once you’ve built a strong credit history, you can take advantage of credit card churning, travel hacking, and low interest rate loans.

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