Have you ever looked back at your life and just wondered, “What in the world was I thinking? How the hell was I misinformed?” Yes, that is me right now.
Okay, a little background. Over 10 years ago, I landed in the United States, a young, smart, but very naive African girl. As a first time out of the country and 1000 miles away from my family, I was excited but overly anxious. It was a life changing journey, one with mixed feelings for sure. Coupled with expectation versus reality.
One thing I wish I learned for sure was how to ‘get started’ early. I grew up in a fairly difficult background. By difficult I mean financially difficult. My father was the main breadwinner of the family and my mother also worked very hard in various ways to help see us through school.
It was fairly tough growing up. I saw my father struggle and get into so much debt and stress to put us through school. His meagre income of about $400 a month was just not enough to put us through high school and college. So, he got loans. He had a fairly stable job and he could comfortably make the payments. This did not last very long because guess what? He lost his job.
This is when things started going downhill really fast. Life was never the same. My dad no longer had a job. He couldn’t make his loan payments. The bank wanted their money. You get where this is going? This experience led me to fear any form of debt. I would say this was a blessing in disguise because it taught me to have a plan in everything I do.
Even though my mom had no formal job, She taught me how to be frugal. She is one of the most financially smart individuals I know. Even though she did not have a formal education or job, she always had some money saved for us for school. She saved as much money as she could for those rainy days. I now understand why she would always say no when we requested for new clothing or shoes. I totally hated it at the time but when I needed some pocket cash for school, she would have something saved up.
I did not know about credit cards until I came to the United States. Infact, I never owned a debit card or a bank account. Even though I was an amid saver with the little pocket money I got for school, that is all I knew. And don’t get me wrong. There are banks and financial institutions in Africa. I was very aware and exposed to them but most people use mobile money for regular banking and transactions. Fairly simple and convenient.
Fast forward to America. When you get to a new place you observe and learn from the natives. They say ‘when you go ro Rome, do as Romans do’. Well not literally. I was told everything in America revolves around credit and I found this to be very true. You got that dream job? They may need to run your credit. You need to buy a car? Well, you better have good credit. You need to rent a place? You may have a hard time getting a place with no or bad credit. And so I asked;
‘How do you start building credit and what do you mean by good credit?’
I was told; ‘Get a credit card.’
‘Just that?’
‘No! Use it and pay it on time and in full every month.’
Even though there is truth to all those statements, I did not get my first credit card until my third year in America. And I will get into how this affected me down the line in a little bit.
I remember when I started applying for credit cards, I got denied for having no credit history and I was like, how the hell i’m I expected to build credit if I cannot be approved for one in the first place? I just didn’t understand. Well the bitter truth is no financial institution wants to risk issuing credit to someone they don’t trust will repay it. Especially being a foreign national. Think about it, what if they issue you $1,000 credit, you max it and leave the country? So after some research, I learned about secured credit cards.
Get a Secured Credit Card
What is a Secured Credit Credit Card?
Secured credit cards are credit cards that unlike regular cards, are secured by cash. What this means is you put down cash for the amount of credit you want to be issued. For me, I put down $300 and was issued a $300 credit. You need to understand though that you will eventually get your money back. After a period of one year or so, deepening on the credit terms of the financial institution, with timely payments and proper use, your secured credit card will be converted to unsecured and your deposit refunded to you.
Secured cards are meant for people with limited or bad credit and require a security deposit when you’re approved for the account. Most secured cards require a deposit of at least $200 or $300. Your security deposit is usually equal to your credit limit.
A credit card is not free Money. You use it and pay it back, if not in full then you will pay interest on the balance. A good rule of thumb is to spend wisely and pay your balance off every month and on time to avoid accruing interest charges and late fees. Only spend what you can afford to pay. Just because you have a $1,000 credit limit doesn’t mean that you can spend $1,000. A good rule of thumb is keep your spending to not more than 30% of your credit limit. For a $1,000 credit, do not spend more than $300, unless you are paying your balance off every month.
Can you be denied for a secured credit card?
Certainly yes! In most cases, the credit card issuer will run a hard pull on your credit. You may be denied if you have a bankruptcy on your record, a history of missed payments, insufficient income or other red flags. In this case, having no credit is better than having a bad one.
And guess what! When you get denied any credit application, it impacts your credit score. This is because a hard pull is done on your credit and this will eat up a couple points off your credit score. When I started applying for credit cards, I was very misinformed about this. The first card I first tried applying for was the Amazon credit card. I applied online and got rejected. I wasn’t aware that with no credit, it would be hard to get approved for a credit card, especially online. So I tried my second one. I thought maybe it was just bad luck with Amazon. So I searched online for other credit card issuers and decided to try Wells Fargo. I got rejected again. So at this point I decided to go to a Wellsfargo branch and try to understand what the hell is going on. I asked the banker why I’m getting rejected and after running my credit he informed me that it is because I have a very limited credit history in the United States. In addition, the multiple hard credit pulls I got in a short period of time also adversely affected my already limited credit.
He informed me of the choices I had at this point which is to apply for a secured credit card. I put down a $300 security deposit and was issued a secured credit card with a $300 credit limit. That is how I got my first credit card.
After 12 months of timely payments and proper use, my card was converted to an unsecured card and my $300 was refunded back to my account. 12 months later again my credit limit was doubled and continued to double every 12 months, of course due to good credit use and timely payments.
What is a hard credit check?
There are two types of credit checks, hard and soft. When you apply for a line of credit or a loan, the issuer will perform a hard credit check on your credit which will negatively affect your score. Soft credit inquiries have no impact on your credit score. A soft pull is what is usually done when you apply for a credit or loan pre-approval.
Become an authorized user on someone’s credit card
If getting a credit card is not an option, another way you can start building credit as an immigrant is to become an authorized user on someone else’s credit card. Although this is an easier option, I find most people very reluctant or unwilling to do this. And I get it. If a bank cannot issue you credit, why should I trust you with mine? Remember, your payment actions will affect the primary card holder’s credit. Additionally, the primary card holder’s payment habits will affect your credit as well. Therefore, you will want a primary user who has a long history of paying on time. Otherwise you are better off without a credit card.
Also ensure that the credit card issuer reports authorized user’s payments to credit bureaus. Not all issuers report this so you will want to confirm first, otherwise your efforts will be futile.
Get credit for regular monthly bills
If you cannot get a credit card or be an authorized user on someone else’s credit card, all hope is not lost. There are ways you can build credit while paying your regular monthly bills. If you rent, ask your leasing office if they report your monthly payments to credit bureaus. You may also have your cell phone and utility bill payments reported to credit bureaus. Remember, for this to be any useful, you will have to make timely payments every month. A late payment report may lower your credit.
Manage your credit well
A good credit score doesn’t happen overnight. It takes a history of good credit management. It takes about six months of a credit or loan issuer reporting your payment activity to the credit bureaus to establish a FICO credit score.
Ensure that you make your monthly payments on time before the due date.
If you are prone to forgetting, which I have been a victim of numerous times, set up automatic payments so you don’t miss your due date and incur late payments. If you cannot pay the balance in full, pay at least the minimum payment due. This will ensure you are in good standing with your credit issuer.
Keep your credit utilization low.
It is recommended to keep utilization to not more than 30%. Spend only what you can afford to pay. Over-utilizing credit may lower your credit score. Also the higher the balance on your credit card, the higher the interest you will pay every month.
Avoid applying for multiple credit cards, especially in a short period of time.
I remember I once maxed out one of my credit cards and I thought it would be best to apply for another card so I can have some more money to spend. Let me just say that was a very foolish move. I got declined of course. Why? My credit utilization was too high. In addition, why would I need another credit card when I cannot afford to pay the balance I have already accrued? My credit dropped tremendously, from the high utilization and hard credit pulls on my credit.
Do not start late, and do not be greedy. Start building credit early and be wise in your spending. Be sure to check out the best secured credit cards to start building credit as an immigrant in the United States.