How to build a good credit score if you are new to the US

‍

A good US credit score is crucial for financial stability and independence. Yet, it can be a challenge for newcomers who will need to start from scratch in establishing credit in the US. Read on to learn more.

‍

US credit scores are 3-digit numerical representations of an individual’s creditworthiness. It is composed of several factors such as payment history, debt level, length of credit history, and recent new inquiries. In the US, credit scores are used in several different ways, that go beyond borrowing:

• Lenders may use credit scores to determine loan or credit card eligibility. A high credit score can improve the likelihood of approval. It can also result in lower rates and higher credit lines.
• Landlords may use credit scores to determine an individual’s creditworthiness. Those with low/no credit may need to prove their financial ability to pay. E.g. Employer reference letters, pay slips, upfront payment of a few month's rent
• In some states, a good credit score can help lower auto and renter/homeowner insurance rates
• Utility service providers may ask low-credit customers to submit a security deposit. Even some employers check credit history as part of their application process.

Here are some tips for newcomers to the US to build a good credit score:

1. Get a credit card.

One of the easiest ways to build credit is by using a credit card.

• You might not be eligible for most cards if you are just starting to build credit.
• Ideally, you would want to get a card with no annual fee, a low interest rate, and a large credit line. If you don't qualify for one, a close relative with established credit history may be able to add you to their credit card as an authorized user. A credit builder card or a secured credit card can be a good option too.
• Refrain from applying to too many credit cards at once when you’re still building your credit. A credit application triggers a ‘hard inquiry’ and too many of these can lower your score.
• Nowadays, some issuers offer the option of checking if you are ‘pre-approved’ for a card. This entails a ‘soft inquiry’ and will not hurt your credit score. This can be a good, low-risk way of determining the likelihood of approval.
• Over time, building a portfolio of cards can be a good strategy to improve your credit score too.

2. Use credit wisely.

“Utilization”, or how much of the total credit limit assigned to you is being used, is a key metric that feeds into your credit score. Avoid maxing out your credit limit. Use your credit card for everyday purchases and ensure you pay off the balance in full and on time each month. This way, you can avoid paying hefty interest charges or late fees.

The key to building a good credit score is to show that you can responsibly use credit over multiple loans, and over time. This means making on-time payments, keeping your balances low, and avoiding spending more than you can afford. Recently, credit bureaus have expanded their scores to include utility data. Ensure you make on-time payments to your utility providers and landlords too.

3. Monitor your credit report.

‍Review your credit report to make sure it is accurate and up-to-date. You can request a free copy of your credit report from the three major credit bureaus (Experian, Equifax, and TransUnion) once a year. You can also sign up for a service such as Credit Karma where you can track your credit score for free.

4. Be patient.

Building a good credit score takes time. You need to demonstrate that you can responsibly use credit over time. It may take a few years to build a good score, depending on your credit usage. Be patient and use credit responsibly; your score will improve over time.

5. Be aware of scams.

‍Unfortunately, there are many scams out there that promise overnight improvements in credit scores or guarantee approvals for credit cards. Know that building credit will take time and that lenders will never guarantee a credit card until you complete the application.

‍

A good credit score is crucial for newcomers to establish financial stability and independence. By using credit responsibly over time, avoiding too many ‘hard inquiries’, and monitoring your credit report, you can build a good credit score in a few years, and gain access to better terms on several financial products. This can save you a lot of money over time, and give you the financial freedom to pursue your dreams.

‍