Establishing Credit in the USA
I am going to post a guideline to establish Credit in the USA as this is one thing many people arriving here in the USA have no idea about initially and then go on to do certain things that can delay or even hurt them getting credit for many months.
How credit works in the USA is that the first step when arriving is that you receive a social security number. That number is now tied to just about every major purchase you make in the USA if you purchase it on credit. Once an item has been purchased on credit, the seller usually reports to the credit agencies on a monthly basis about how you are handling your payments, the credit limit that was given to you and the current balance. There are 3 main reporting agencies and each one has a separate formula for determining your score. In this country without a good credit score, it will make it difficult to purchase anything on credit, receive credit cards, rent a home or apartment or even just get utilities turned on. Based on your score, the lender will also determine what interest rate you will receive.
Fico Scores range from 300-850 and there is no need to excel to think you want to be in the 800+ range which is determined superior credit because once you are around 760+, you will not have many problems getting credit and the best rates. However, a 760+ score does not happen overnight, this takes time and planning. Yes, I mention planning because that is what it takes to get a good score.
A credit score is made up of various factors:
35% - payment history
30% - credit utilization, how much of you credit you are using
15% - length of credit history
10% - types of credit used, installment loans, credit cards, mortgage, etc
10% - recent search for credit history or credit recently received
So here goes a strategy I have suggested to several new arrivals and seems to have worked very well although you must anticipate a wait of around 18 months before you can be considered to have established yourself completely using the following techniques. This should then get you unsecured debt and credit cards or normal financing like others with established credit.
First off, get your social security number.
1. DO NOT fall into the trap and see adverts for cheap automobiles, zero down and low interest financing and go and try and purchase one. Auto dealers are famous for trying to get a deal done and will run your social security number through multiple banks and you will have multiple enquiries which will then hurt your fico and those enquiries stay on your credit report for many months.
2. Get yourself a SECURED credit card, how this works is that you need to put a certain amount in savings and then that is the amount of credit that will be granted to you. The reason for this is that without a credit card, it is difficult to rent vehicles, make hotel reservations, air travel, etc. With a checking account you can get a debit card that is linked to your checking account and will have a visa or mastercard logo that can be used in some of the above mentioned transactions, but it does not help build your credit.
3. Once you get that card, limit yourself to no more than 35% of its limit or maximum 50%. I know it does not sound like much, but remember, this is all part of the bigger picture and you have to hang in there for the time it takes to get those unsecured credit cards. They might not start off with high limits, but you will get a few and then the limits will increase as you continue to establish yourself.
4. If you are looking to purchase a vehicle and you can afford approximately 40% - 50% down and can show employment, in most instances you will be financed and this type of financing goes a long way to building your credit score.
5. If you can afford a home, come up with 20% or more as a down payment and show employment, in most cases you will find a lender. Now, in the current economic turmoil, it might be 30% that would clinch the financing, so either save a little more or downgrade.
Out of the above items, the one that will build your credit the fastest, is the home purchase, followed by the auto loan and then secured credit card. The secured credit is the easiest and should be the first step, if you are going to buy a house immediately then do that before the vehicle as it shows you are more solid when going to buy a vehicle if you own a home. If you are going to rent for some time then buy the vehicle first. You are going to need a vehicle and even though there are good used deals out there where you can pay cash, I always suggest buying a new smaller car to start from one of the large auto dealerships where you will be approved 9 times out of 10 if putting down 40-50% and can show employment. Used car deals are much harder to finance even though they are less money. Putting down 60-70& will certainly guarantee used financing, if you have no choice, but if you go this route, make sure there is still a factory warranty left. That is the reason why I also suggest new, you do not need to worry about the vehicle. If you must buy used, insist on a carfax report that will tell you the entire history of the car.
One other very important point I need to mention here about buying a car. NEVER EVER go into the dealership without someone who has had experience in dealing with car dealers here in the USA or you are a very skilled and seasoned negotiator. It is very rare to ever hear of two people going into a dealer ship buying the same car and getting the same deal, NEVER. There job is to get the most out of you at the highest interest rate with the most amount of add on’s as possible. In the negotiating process, they will call over their manager who will protest he is doing the best he can and no better. I guess, I would be doing a disservice if I did not provide information here on how to handle a car dealer, but that could turn into its own post, so I will try and make it brief.
Buying a Car
1. Do your homework on what you want FIRST and what options you want. You can then go onto most dealerships/automakers websites and see what they have available and the price they are selling for MSRP, THAT, is what they would like to get from you and if they can with a high interest rate, extended warranty and other add on’s they have done well. So what you need to do is research online sites and obtain the dealer invoice price. Many sites used to provide this info, but an online search should find this. Failing that, when you walk in to buy a car, and are approached by the first salesman before you are even out your own vehicle, just greet them politely and say you just want to look around. They will follow you like a piece of gum stuck to your shoe, just ignore them and keep looking to see if they have what you are after. Then walk inside and ask for the sales manager, say you are not interested in anyone else but the senior sales manager. If they do not call him right away or give a run around, just start walking out, he will be with you by the time you reach your car, if not, go elsewhere.
Once you are with the manager, say you are interested in purchasing X car and you would like to pay $250 - $1,000 over dealer invoice. If you have got the dealer invoice before hand, show it to him, if not, request him provide you the dealer invoice. If they do not want to show you the dealer invoice or do not want to make a deal, get up and leave, they will try everything at that point to keep you if they want to make a deal. There are a lot of dealerships around and you will end up with a deal at one of them. Now another important point here, DO NOT hand over your social security number until you are going to BUY the car. They will say they need to check what you qualify for, etc etc. Do not give it as they will use the info to run your credit at several finance houses and if you do not end up negotiating a deal, your credit is already run and the next dealer will see this and know you are trying to get credit. So, negotiate the deal including the interest rate you want to pay by telling them you are putting 40-50% cash down to the point where they want you to give a signature on their negotiating document.
Do be upfront with the sales manager that you are putting down a large deposit because you do not have a credit history, but you are employed. (Don’t try and buy a house or car if you cannot prove employment) At that point sign on the terms you are comfortable with and THEN and only THEN, allow them to pull credit. At this time, they might try and push your interest rate up as you will have no credit history, but try and resist and say you told them that already. It could go as high as 10-11%, once the lenders come back with what they are prepared to offer, anything beyond that is robbery. HOWEVER, you can try and negotiate it lower at that point, but it requires good skills from now on. Remember though, you can always refinance the deal in 6-9 months and lower the rates once you have paid consistently and show a credit history. Sometimes you just need to bite the bullet initially to get that credit established.
Returning to Building Credit.
Now that you have your secured card, possibly an auto or maybe even bought a house, the next step is to just be patient. Do not rush out and try for credit at department stores, once you have any one of the above credit items, you will begin receiving daily solicitations in the mail for credit cards. Throw them in the trash, you are not worthy yet, I say this as a joke, but mean it, do not try and get additional credit cards, unless secured, until you have being consistent with the credit you had for a good 9 months. (Saying you have been pre-approved, does not necessarily mean you will get a card, but it will definitely mean an enquiry on your credit report if you respond.) After that point go to a service like myfico.com and purchase your credit history and credit scores from all 3 reporting agencies. You will see where you stand and if there are any discrepancies. If you score is in the mid-upper 600’s, it will then be a good idea to apply for an unsecured credit card. At this point, it would also be good to get some department store cards, not many, but maybe 2-3 to help with your credit mix.
When you have received any type of credit, make sure if it is a credit card, that you do not use more than 30-50% of the available credit, always try and make more than the minimum monthly payment every month and do NOT skip payments, that will stay on your report for several years and will hurt you until it drops off.
This forum (http://ficoforums.myfico.com/fico/) is a great place to do additional research and read about others stories and get tips on credit card deals, etc. You will also be able to read which are the best department stores to start credit with etc.
Good luck and if you just follow the simple rules, you will be on your way to having an established credit history. So the quicker you start the process the sooner you will be on your way.