How to build credit as a new U.S. citizen
By Erica Sandberg
July 26, 2016
I am a recent U.S. citizen, having moved here from Paris. I have a Social Security number and a U.S. bank account. I’ve had a credit card for one week. I would like to buy a house soon. Can I speed up building my credit score? — Marc
If only we could slow down the clock for certain things, such as vacations, and accelerate it for others, such as building a long and positive credit history. While we all are limited by the realities and limitations of time, there are some things we can do to improve our credit ratings.
Because a mortgage lender will want to be confident that you are a good lending risk, that lender will check your credit reports and credit scores. Many mortgage lenders also require a borrower to have at least a year’s worth of positive credit history with a few credit accounts to accurately assess creditworthiness. In lieu of that, some lenders will accept a long record of perfectly paid utility and cellphone bills, but since you recently moved to the United States, you won’t have these to present as an alternative.
So let’s focus on your credit scores, Marc.
Credit scores reflect the information in your credit reports, and lenders and other businesses use these to determine creditworthiness. There are two major credit scoring systems in the U.S.: FICO and VantageScore. The latest versions of these scoring systems have a range of 300 to 850, with higher numbers being preferable.
For a low interest rate mortgage, your scores should be in the mid-700s or above. To get your scores in the 700 club, you’ll need to have a lot of great information on your credit reports.
Your new credit card will show on your credit reports — the date you qualified for the account and your credit limit will be there now. When you use your credit card, the average daily balance also will show up on your credit reports. If you roll over a portion of the balance to the next month, your credit reports will indicate a debt. Whether you make your payments by the due date also will be noted.
Because all lenders consider on-time payments and credit utilization (low debt relative to the amount you can borrow) to be low risk behavior, your credit scores will rise over time as this positive activity is recorded.
Here are two additional ways to boost your score:
Add another credit card: You can’t make the months pass faster, but you can add more positive information to your credit reports by getting another credit card, and then using it in the same responsible way as the first.
Take out a small loan: Add to your “credit mix” by financing something other than a home, such as a car or furniture. Or you could apply for a credit builder loan, either through a local credit union or an online lender, and then make your payments on time and in full.
But don’t apply for more than a couple of loans and credit lines in quick succession. Credit inquiries ding your credit score temporarily. It’s best always to apply only for the credit you’ll qualify for and actually need.
After you’ve done all you can to get your credit in shape for a mortgage, it’s a waiting game. Within six months after opening your first card, a FICO score will be generated. VantageScores kick in earlier, as they require just a month of credit history. Your credit scores should keep rising, as your record of positive payment activity grows.
Since you want to purchase a home soon, keep a close watch on your credit scores. You can get your FICO scores for about $20 per credit report from MyFico.com. VantageScores are free from several providers, including my.creditcards.com. Don’t worry about the impact of checking your credit scores — this is not considered a hard inquiry.
Finally, know that your income and the amount of cash you have readily available is a major consideration to qualify for a home loan. Credit reports and scores are records of your past, but your ability to consistently pay your mortgage depends on what you’re earning today and in the foreseeable future.
The more money you earn at work and that your job looks as if it will be stable for at least a year, the more likely you are to secure a home loan in the amount you want and with a low interest rate and other attractive terms.
One more thing? Make sure you can pay the down payment on a home and have some extra savings, too. The expected down payment is usually 20 percent of the purchase price, and closing costs are typically 2 to 5 percent of the loan. It’s also recommended that you have some extra cash in the bank to cover unexpected repairs, expenses and even job loss.
I hope this doesn’t sound overwhelming! To boost your scores to qualify for a home loan, add a couple of additional credit products to your portfolio, pay all your bills on time, keep your debt low, save a lot of money and wait a year.
With all of that working for you and a steady job, too, your credit scores should make you mighty attractive to a mortgage lender.
SEE ALSO: 6 ways immigrants can build credit