New to America. How to build credit?
February 21, 2013 10:36 AM   Subscribe

I moved to America about a year and a half ago. My credit score is between 600 - 640 depending on the agency. I don't need credit now, but I want to buy a house later this year. How can I improve my credit given that I have no use for credit cards beyond the one I already have, and I pay cash for everything? Details inside.

Through my employer I was able to open a credit card with a high limit that has been in good standing since then. I also opened a store card without realizing that it was a credit account with a bank that I detest. I closed the account immediately but not before a charge had been made to the card, which I corresponded with the bank about, as I was unable to get any information about what the charge was for. I still have not received that information, but paid the account to avoid getting into worse credit issues. Now there is a delinquent account of about $100 on my credit history. I will not make that mistake again.
I keep being told that the way to build credit is to open & use more credit accounts - but this seems insane to me. I have plenty of money, I don't need credit for anything. I use my credit card for travel, I never even approach the limit and I pay it off every month in full. Will my low score and delinquent account affect my ability to get a home loan? Is there anything I can or should do in the interim to improve my score? Am I overthinking this?
posted by anonymous to Work & Money (13 answers total) 4 users marked this as a favorite
...and I pay cash for everything?

This is a good habit if you're bad with money because it keeps you from overspending. If you are a fiscally responsible person, this is a bad habit because you're not building credit you should be for no good reason whatsoever.

The goal is not to open and use MORE accounts, the goal is to have at least one long-standing credit account which you use frequently (but, because you can get dinged for coming too close to your limit, not too frequently -- this is where the benefit having multiple accounts kicks in) and pay off, in full, every month, like you already do.

So stop spending cash. Haircut? Pay with the card. Restaurant? Pay with the card. Gum, a newspaper and a soda? Pay with a card.
posted by griphus at 10:41 AM on February 21, 2013 [3 favorites]

You can try to get a secured credit card where you have to pay a deposit in the amount of your credit limit. It's really only good for building a credit history.

Part of the issue is length of time having credit, so it's really best to start building a credit score early. It won't stop you from getting a home loan, but it will affect the rate you'll be offered, so it's probably worth the bother.

Also, credit card fraud protection is good for online purchases.
posted by GuyZero at 10:42 AM on February 21, 2013

Also, having too many existing lines of credit can ding your credit rating, so don't just go and open a shitload of credit cards.
posted by griphus at 10:42 AM on February 21, 2013

Your credit score is essentially a record of how reliable you are when it comes to paying things as agreed, it is not really a measurement of your overall financial responsibility, which seems like what you want it to be. Lenders don't care if you're overall responsible as long as they get paid back, so that's what they track.

You cannot make a huge difference in your score by later this year because it will still have been a fairly short record of paying people back on time by then. Your best bet is probably to have one or two credit cards open, and either not use them for anything, or make sure they're paid in full every month.

Personally, I don't try and cultivate my credit score at all because I find it to be a waste of time. While mortgage lenders will see your credit score, they will actually pore over the whole history and look for delinquencies and past history of paying back large amounts. One extra credit card account will not make a huge difference, even if it raises your score by 30 points or whatever.
posted by tylerkaraszewski at 10:46 AM on February 21, 2013 [1 favorite]

Opening new lines of credit is a bad idea, because rating agencies look at how old your credit lines are. Having one or two lines of credit that have been open and in good standing for a long time (like several years) is a great thing.

Unfortunately for you, while it's really easy to mess up your credit score really quickly, it's virtually impossible to dramatically improve your score in less than a year. The thing that improves your score more than anything else is doing everything right for several years in a row. If you're trying to buy a house later this year, there's not much you can do to improve your score.

Having a score around 640 will keep you from getting the best rates, but that said, interest rates are historically very, very low right now, and it's possible that buying a house now while interest rates are low will be better than waiting a couple years for your credit to improve.
posted by smoq at 10:49 AM on February 21, 2013

Whether or not you think it's insane to use credit you don't need, do it anyway. Your beliefs about the logic behind the credit system do not have the ability to change the system.

Start using your credit card, and pay it off every month, and you will improve your credit score in 6-12 months.
posted by Kololo at 10:55 AM on February 21, 2013 [1 favorite]

The credit system is insane, and you just have to accept that and take it for what it is. (You'll also have to accept that bucketloads of unwanted junkmail in your letterbox is something you just have to live with).

Bad news: my experience moving to the US was that my credit was decent enough, but when I applied for a substantial loan (car), they declined the amount I sought and wouldn't go above $10,000 (I didn't shop around much, so that isn't data, I'm just leading up to my point) At the seven-year mark, this completely evaporated; Here - have as much monies as you like! We loooove you! My suspicion is that your credit rating won't reflect your true credit-worthiness until the seven years are up and your record is longer than the records (7 years) - no suspicious blanks (you possiblly-an-identity-thieving-ex-bankrupt you!). Different institutions will probably evaluate immigrants by different metrics, so try to find out which you best fit with.

So my advice would be to make sure that whatever mortgage you get, plan on refinancing it in 7 years.

Speaking of car loans, my instinct would be to get a car loan that will be paid off by the time you're looking for a mortgage, but paid off in a way that you ended up paying a lot extra for it in interest. Maybe a disreputable dealer can sell you a cheap-ass car but shaft you on the interest rate? You would want to talk to a financial professional first though - for all I know a credit agencies algorithm might say "hmm, dealer didn't seem to trust this person, maybe he knows something we don't?". However my understanding is that credit agency algs will actually say "Whoa! That dealer totally made a fast buck off this person and they totally paid up! This person is a money-tree!"
Most obviously though of course, the gains might not be worth the hassle - a year of credit history is always going to come up short, because it's just a year.
posted by anonymisc at 11:22 AM on February 21, 2013

Don't close credit accounts. Unless that store card had associated fees, just leave it open and don't use it. Closing an account is a stupid way to ding your credit score unnecessarily.
posted by ablazingsaddle at 11:33 AM on February 21, 2013 [1 favorite]

Assuming that you have your credit report, scrutinize it carefully. The FTC recently found that 26% of consumers had an error on at least one credit report (though not all of those errors were significant).

One strategy that has the advantage of being easy to follow and remember is to get a no annual fee high limit card and use it only for one regular expense, e.g. gas for your car or your monthly utility bill, and nothing else.
posted by Wretch729 at 12:10 PM on February 21, 2013

It really depends on how much you intend to put down on your house.

Even with 'meh' credit, if you're putting down a substantial down payment, you should be able to negotiate a decent mortgage rate.

You might have to go to a credit union or small bank so that an actual loan officer will discuss it with you and can use alternative methods to verify your credit worthiness. These would be utility bills, on-time rent payments, etc.

Go to your bank/credit union and discuss this in person with a customer service person (that guy or chick in a suit behind the desk when you first walk in.)

They can probably open a credit card for you, and discuss your mortgage options.

If you want to learn more about credit scoring, you can go to My Fico, or to one of the other sites that will give you your credit score.

They even have information like, "How to improve your score."
posted by Ruthless Bunny at 12:30 PM on February 21, 2013

As a I guy who lived in the US and did not have a credit history - let me tell you its hard to up your score after a certain point.

As noted above, what creditors want is proof of reliability not just current financial health. I know it was really tough in the US where our credit score really was the deciding factor on your credit worthiness (as opposed to Canada - where it seems like a number of factors come into play).

What you need to do is develop a history - which you can't really rush or manipulate. Be careful of looking for ways to open new credit - any inquiry to a credit agency is actually a pretty bad ding on your short term score (the more inquries - the riskier you seem).

I had a montlhy monitoring service with Equifax (which I have recently re-started for other reasons). It let me check my rating to make sure nothing weird was happening and they gave tips to improve my score. Which in my case (and propably yours) was a function of time.
posted by helmutdog at 2:32 PM on February 21, 2013

Don't use cash. Just pay everything with the card and pay it off in full at the end of the month.
Credit cards will also give you protection and additional benefits (points, rental insurance, extended warranties, etc...)
posted by WizKid at 1:08 PM on February 22, 2013

I live a pretty cash lifestyle meaning that I only spend what I have. Although, instead of paying in cash, I pay by credit card and pay off the full balance at the end of each month. My card has no annual fees and I never carry a balance so they never charge me interest. I pay exactly what I spend.

I have one checking account and one credit card with the same bank. My paycheck goes in my checking account and pays my credit card in full every month. And viola, I'm building credit!
posted by p1nkdaisy at 3:02 PM on February 22, 2013

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