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Posted By Subodh on Sunday, September 14, 2008
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Image Courtesy: Experian Ever seen those "check your credit report for free" advertisements? Know that you shouldn't actually click on them? Or for that matter never ever authorize your bank to watch your credit score for you? If you are one of those unfortunate few who have immigrated to the US recently and have a very short credit history, you need to know a few Dos and Don'ts that is not normally obvious.

Before you read further, it's time for the usual disclaimers1 up-front.

 

What is a credit score? It's a number between 300 and 850 and is a reflection of how well you've been managing your finances. A must read about how it works is available at Wikipedia and at myFico Credit Education.

 

Once you've read the above two mentioned articlesImage Courtesy: Equifax, come back here and read on.

If you have recently landed in the US or do not have any credit cards, you probably have no credit score. You need to open up your first credit card as soon as possible. This is the difficult bit; nobody will give you a credit-card unless you already have a credit-score, and you can't get started with your credit-history unless you have at least one credit account in the first place.

This is what I did: I approached my bank assuming that if my salary was deposited in a certain credit union/bank, my best bet for a lender would be that bank itself. Unfortunately though, when I did ask for credit, they performed a hard enquiry on my credit-file, and since I did not have a credit yet, they invariably declined the request.  Further, every time I made a request, it would result in a hard enquiry, which in turn, hurt my credit history even more.

Here's the deal, though: Most people in America are nice. Chat them up. Bug them until they give you credit. I would go to the bank every day and ask for the status of my credit-request. Even when they gave me excuses each time (that their back office decided not to give any credit), I persisted! All you need to say is "Ok, I'll come again tomorrow and maybe you'd change your mind.", with a polite smile. Go again next day, and even though they might come up with new excuses, sooner or later, they will run out of things to say.

They eventually give in to persistence, even if you are a pauper. You get your first credit card, albeit with a very low limit (which really doesn't matter). Be careful though -- NEVER ever get a charge-card. It permanently dents your credit report. Worse, lenders like AT&T will use that as an excuse to demand a deposit to provide you with anything. "Once a deposit, always a deposit" is their motto.

The same goes towards opening your general-utility accounts. If a lender asks you to pay deposit, tell them to take a hike. Of course, you cannot do that with utility companies like PG&E (and they won't normally ask for  your SSN either) but you can definitely survive on a pay as you go cell-phone instead of paying a deposit of $500 or more to a phone company.

What is important to understand though, is that even though the length of your credit history is short, you can still rack up a high score within a few months, if you are careful enough. Here are some of the DOs and DON'Ts.

A word of caution here: The following scenarios assume that you do not actually need any money, that you can pay your bills on time, and are a financially-sound person.

1. Monitor your credit. This is on how not to monitor your credit. Go directly to a credit bureau and sign up. For example, go to Transunion, Experian or Equifax. I would recommend Image Courtesy: Equifax Score Watch Gold from Equifax (with 2 free credit reports in a year). Even though you can pull in a 3 in 1 credit report (which doesn't count as an enquiry), notice that whichever bureau you use,  you will only be able to see the credit score from the bureau you signed up with. The bureaus don't need to give you a fake credit score from others.

As part of monitoring your credit, you also need to ensure that all the information with all the agencies is accurate. If not, they would help you correct it and it's as simple as clicking a button. Another gotcha; notice the address and information. Whenever you apply for credit, make sure it's always the same. It certainly doesn't look nice on your credit file if you have switched your homes every 3 months (even if you didn't- you probably just gave your home address at the DMV, and just forgot to update your address at the office).

2. Open enough credit lines. Okay, this is something meant for long term, should not be done within a short time-span (though, if you want, it could possibly be applied in that case too). Having enough credit lines, sufficiently healthy (high) lines, and having different types of credit available -- all while maintaining a good credit score is an indication that you are credit-worthy. Yeah, I know - it's a no-brainer, but how do you actually go about doing that?

Well, first you get your score to a level (by just waiting) where you cannot be turned down for credit (usually more than 680). Let's say your sole credit card (say, VISA) is more than a year old now. You check your score with Equifax and realize you won't be turned down. Technically, you could apply for a Citibank Mastercard, an American Express card, a Discover card and any other card within an afternoon, and get them all approved with large enough credit-lines. Here's the secret: all consolidation happens in the late hours, and so, even though you may have signed up for alerts on credit activity and what not, nobody actually knows you made an enquiry until the next day. So, if you had zero enquiries in last one year and you made 2 enquiries today, chances are the lender who makes third enquiry today will see zero enquiries only (Image Courtesy: Equifaxyour report as it stood yesterday).

Know this though: Yes, you can certainly game the system for that one day. Your credit score, however, will take a nose-dive for the next year. Opening multiple accounts within a short time span carries a huge penalty and not just drops your score, but those enquiries also stay for about 2 years and make your report look bad till then. Of course, if you can live with that, it is a good way to ensure that at the end of two years, not only will your score be very high but you;d also have enough reasons to look good in your report.

 3. Keep multiple enquiries very close to each other. Maybe this is another corollary of point 3. There are times when multiple enquiries are unavoidable for example, when you are car shopping, you might need an enquiry done at Infiniti as well as Lexus dealership. (BTW, never waste an enquiry on pre-approval - You'd always end up with at least two unnecessary enquiries). Of course, if you get them done within one or two days, the credit scoring system recognizes that you were just rate shopping. The same goes true for mortgae enquiries but remember, the time-span for such enquiries is very low (less than a week) and is restricted to those categories (Auto, Mortgage) only.

4. Do use the credit. This one is counter-intuitive. Many lenders do not actually report the credit limit. When a lender such as Capital One or American Express Green does not report your credit limit, the maximum balance ever is used as the highest available credit limit. So unless you have used all of $10,000 limit on a card, there is no way for the bureaus to know that was your credit limit(and your average available credit limit remains low). My advice would be to stay away from such lenders or products simply because it is so selfish of these lenders to report on you when you have a balance but not help you with your credit score. This is also the reason one should stay away from charge cards (or the no pre-set limit cards). There is also a much more important reason to carry a small balance forward once in a while, especially after you clear the balance on any account. For example, lets assume you used up about $5000 on a $6000 limit revolving account. In subsequent months, if you clear your balance to zero, it would be rare to see that balance Image Courtesy: Equifaxreflected in your credit report. The reason is simple: the lenders religiously report as long as you owe them money. As soon as you don't, they take their own time to report back (which at times can be delayed more than 6 months). Oh, but swipe just $2 on that card and see the alert pop up and your balance correctly reflected! Retards!

 5. If you paid before 30 days, they do not know.  Credit score is not about having a lot of credit lines and still not having debt. It's more about, having a lot of credit lines, having used all of them in the past and still be debt free. It's about whether you have financial experience or not, whether you can take risks and come out unscathed. Be sensible. Spread major purchases over at least one year periods. Use  the credit lines often enough so that your accounts do not go dormant but utilize very little or pay off in two months period (If you pay off too quickly, nobody ever knew).

 


Image Courtesy: Equifax1. Never ever sign up for the numerous credit monitoring offers coming your way unless you sign up directly from one of the credit bureaus: Equifax, Transunion or Experian. I'll tell you why. It doesn't matter what they claim, they do not have access to your credit score. For example, if you go and sign up with Citibank/Amex/Chase/.... for their credit monitoring service, even though you are basically authorizing them to check your credit file whenever, wherever they want, they won't really do that. If they did that, they would be paying the credit bureaus more money than they are making off of you. So here is what they'd do. They'd pull a full credit file once and then subscribe on your behalf for alerts on any enquiries from then on. What does this give them? Well, since FICO does publish how they calculate credit scores your score is actually simulated based on the alerts. The aggressiveness and different methods adopted by the three credit bureaus is also accounted for and you are shown a fake score for each credit agency. Huh? And you thought you can get that 3 in 1 report from all the three credit agencies every day for free?  Nope! At best, when you subscribe to such monitoring services, they would probably run a full credit report check every quarter or every six months. In any case, the score you are looking at is a simulated score, not the actual one. It's kind of funny to assume your Experian score is 720 because your lender gave you a simulated score but when you applied for credit, it turned out your score was actually 614 from Transunion. Very likely and very possible.

Image Courtesy: Equifax 2. Never sign up for credit monitoring with the same lender who issued you credit. Of course, it sounds so convenient that you'd have one login and you could see everything. However, things can actually get ugly if say, American express issued you a credit card and you also used their Credit Secure monitoring services. First off, see reason 1; it always holds true. More importantly, there is a  reason you see those numerous offers coming through to you from your lender to scare you into thinking that your identity is going to be stolen tomorrow if you don't sign up with them. As your lenders, they can make easy money off of you for monthly, directly debited bills however, that is not the real reason.  As your lender, the credit issuer can make soft inquiries with a certain classification(AM or AR) within a certain time gap. Before you get alarmed, it's not much harm since they don't find out that something is wrong. As your credit provider, they have rough estimates. For example, the score band in which your score lies, the approximate number of lines you have, the approximate balance and available credit etc. However, that information is just sufficient for them (and in your good interest -- if this information itself looks bad, you really are in trouble). The lenders need your authorization to know the exact detail about you by signing up with one of the bureaus where they can make a soft enquiry about you once every three months and also pull a full credit report. The process itself is not much of a harm except that when you do not have a lengthy credit history, you do not have many credit lines, in fact even though there isn't anything negative about you, there isn't anything positive about you either. The result: the lender gets apprehensive and (because they had access to your credit file) cuts short your credit lines. What was given as a $5000 credit limit credit card will suddenly drop to a $500 credit after you sign up for credit monitoring with them. Lowering your credit limit hurts you much more and the lender will forget that it's their action itself that makes your credit report look bad.

3. Never carry a balance more than 30% of any revolving credit accounts (credit cards). In fact, keeping the utilization less than 10% is the ideal and if there are no other significant negatives in your credit history. Another corollary of the same rule; never open a credit account with a lender if you get a very low limit. Even if you have made the enquiry and the lender has communicated to you how much limit you get, if it's too low (relative to your other accounts), just call them up and tell them to get lost. It is important to make sure that your average credit limit and the lowest credit limit are closer together or towards the highest credit limit.

4. Never close a revolving credit account unless it due to reason 3. The reason is, closing your credit account lowers your credit limit but there comes a point as you are building your credit history that an account with lower limit actually hurts you more than just shutting it.  The longer you keep a revolving account open, the higher is your average account age, and the more insulated you are to fluctuations from recent accounts. In the same vein, stay away from small time lenders - Capital-One, for example; you can always call them up before you apply and ask them what is the highest credit limit they give (without giving them the SSN)  for an abnormally high score say 800. I called up Capital-One and they sheepishly agreed it's rarely more than $1000.

5. Do not make more than 2 enquiries in a year. Remember, whoever asks you for an SSN is going to make an enquiry, and whether it's just for a cell-phone or for mortgage, it will stay on your file for 2 years. In the absence of anything else negative, those are what will pull you down.


 

You are done reading my rant. Now if you are wondering why I didn't bother telling you about having your accounts in good standing, about protecting your identity, about the benefits of credit monitoring and what if simulations, about getting 0% transfers, about avoiding high APRs etc; you don't need my advice if you are already at that stage. Such things are common-sense and available all over the Internet. Just google for "compare cards!"

 

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DISCLAIMER I'm in no way a credit management expert, nor a financially savvy guy. Most of the information about credit score management is available online and this article merely presents the same facts, albeit focusing more on aspects that are not well documented or obvious. This article is not about gaming the credit scoring system and any such nonsense. This article is in no way meant to endorse or otherwise to criticize any lender, company or corporation. Names appear just to cite examples and do not represent any facts. The information contained in this article may be inaccurate and should only be used for initial fact finding purposes, but in no case can be relied upon.

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 Comments & Discussions

  • Gravatar
    Jitendra Monday, September 15, 2008 at 6:56 PM
    Re: New to US? Lock down your Credit 101s
    An excellent treatise on how to build a good credit score! Well, this article is more than that, as it also explains how a credit reporting really works and how to avoid surprises and make sure it does return a good credit score.

  • Gravatar
    Jack Monday, September 15, 2008 at 7:59 PM
    so according to you, when can I apply for credit after the first card?
    I already have a $300 credit card from Capital one. I get a lot of preapproved offers. Isn't that guaranteed? Is that going to affect my credit score? by how much?

  • Gravatar
    Subodh Monday, September 15, 2008 at 8:06 PM
    Re: so according to you, when can I apply for credit after the first card?
    The pre-approved offers mean nothing as far as your ability to get a credit card is concerned. It just means, one of the credit agencies made some money by giving a bunch of aggregate information. The lender actually does not know your actual credit score, only an approximate zone in which your score lies. You should check your score with a credit bureau directly and if it has been more than a year since you made an inquiry and your score is in high 700+ mark, you can apply with the pre-approved offers. This is actually the only scenario where using a pre-approved offer is better than applying directly.

    A $300 credit card ? Man, that thing is going to pull down your credit score down a lot if thats the only revolving credit line you hold. Its an indication that a lender did not trust you enough. You should probably call them up and ask them to revise your limit first.

  • Gravatar
    garg Tuesday, September 16, 2008 at 6:26 AM
    wierd question
    cud u throw some light on spouse situation? my wife has credit card in my name. how can I apply for her credit card? she has no work yet but will work in future

  • Gravatar
    garg Tuesday, September 16, 2008 at 6:28 AM
    wierd question
    cud u throw some light on spouse situation? my wife has credit card in my name. how can I apply for her credit card? she has no work yet but will work in future

  • Gravatar
    Subodh Tuesday, September 16, 2008 at 5:15 PM
    Re: wierd question
    If you mean you have given your wife an add-on card in your name but she has no credit card of her own, you have already helped her raise (or lower) her credit score depending upon how your credit situation is. Her not having an employment only means she would not get abnormally high credit limits. If she has a good credit score, wait for a pre-approved offer that seems good and apply. She won't be refused credit simply because she doesn't work. I hope this is what you were asking. Again.. see the ***DISCLAIMER***

  • Gravatar
    Lost Wednesday, September 17, 2008 at 3:33 PM
    one of you fuckers is wrong
    JD Roth says on Lifehacker that it is okay to close an unused credit card. You say DON'T. Which one of you is right?

    • Gravatar
      cooli0s Wednesday, September 17, 2008 at 5:48 PM
      Re: one of you fuckers is wrong
      Which post are you guys referring to? I want to know too.
      @Lost -- bad language you dumbass

  • Gravatar
    J.D. Roth Wednesday, September 17, 2008 at 5:41 PM
    Re: New to US? Lock down your Credit 101s
    Lost -- first, I don't say that it's okay to close an unused card. That's for you to decide. I merely cite the info I've found, which indicates that it *can* be okay to close an unused card. I very clearly state that doing so *can* have repercussions, though. Subodh has first-hand experience with those repercussions.

    I think the decision whether to close a card is personal. If you struggle with credit, then I say it's a good idea. If you need to keep your credit score up, then I think it's a bad idea. Only you can make that call.

  • Gravatar
    subodh Wednesday, September 17, 2008 at 7:44 PM
    Re: one of you f****** is wrong
    Roth has his post here Thanks Roth for your comments here although I still feel one should never close a credit line unless as explained in DONTS section 3.

  • Gravatar
    Stacy Wednesday, September 17, 2008 at 8:04 PM
    Re: New to US? Lock down your Credit 101s
    I agree with subodh that one should avoid closing credit cards as far as possible. This only applies to credit cards not your other credit lines like mortgage and installment. its important to understand the difference.
    good article I buzzed it.

  • Gravatar
    foreigndude Wednesday, September 17, 2008 at 8:07 PM
    Re: New to US? Lock down your Credit 101s
    It took me close to three years to go from no-credit/fresh-off-the-boat to the mid to high 700. I'm pretty sure it could have been faster if I followed something like this list, but as an encouraging comment: it's not that hard. I'd suggest looking for easier to get credit cards associated with big retail stores such as Sears, Target, since it's much easier to chat them up.

  • Gravatar
    aliseya Wednesday, September 17, 2008 at 11:12 PM
    Re: New to US? Lock down your Credit 101s
    an option for getting a first line of credit is to get a secured card. basically you give the bank $300 to hold until you close the account, and they give a card with a $300 limit. Then after a short amount of time, assuming you have used the card and paid at least the minimums on time, you'll have established enough credit to get an unsecured line.

  • Gravatar
    Krystal Thursday, September 18, 2008 at 4:16 PM
    I want to open a card. What score is a good score?
    Thanks for a really informative post. I did read Roth's post as well but nobody explains what is a good credit score and what all is mentioned in credit report.. Why does somebody need a secured credit card? If I pay rent on time every month, that itself counts.

  • Gravatar
    subodh Thursday, September 18, 2008 at 5:57 PM
    I want to open a card. What score is a good score?
    A good credit score's definition varies;

    1) By the type of credit line you are seeking for example credit card (revolving line) or mortgage or an installment.
    2) By each credit agency; for example, a score of 675 or more is a good score for experian but on Equifax, anything less than 700 is so so...

    Credit card scores are divided into zones, calculated as percentile of US users who belong to certain statistic. According to those statistics, if you do better than the average score of US consumers, you have a good credit score.
    Again, having a good credit score in itself is no guarantee of a lender approving your credit request. At best, it may get you a pre-approval.
    Lenders need to look at your credit file and make a decision.

    To answer your last question: No, paying your rent does not directly build your credit history. Only financial institutions who provide you
    with a line of credit are required to report to at least one credit bureau.

    Of course, if you have been good at (rent) payments, there won't be a collection record happy so there won't be a negative!

    Personally, I would stay away from Secure cards but Aliseya brings up an interesting point, it is possible and easier to get secured cards.

  • Gravatar
    Ritesh Thursday, September 25, 2008 at 9:52 PM
    Re: New to US? Lock down your Credit 101s
    Amend the title of this post Sir.
    It's for anybody and everybody who is here to stay in this country for a while.
    I bet the information you've posted comes through experience and not just browsing through internet.
    Kudos for putting this together
    What more can I ask for.
    Whatever queries I had are all answered herehappy

  • Gravatar
    Chetan Thursday, October 09, 2008 at 12:46 PM
    Re: New to US? Lock down your Credit 101s
    Hasn't anyone here heard of "Secured Credit cards"? That's the way to go for all US newbies.

    Basically, you put $500 (or similar amount) in a CD in the bank and they issue you a Credit Card with a $500 limit. If you miss payments, they grab your $500. That's it. And oh yes, they report your credit history.

  • Gravatar
    subodh Friday, October 10, 2008 at 4:13 PM
    Re: @Chetan
    Secured credit cards should be used as a last resort and if possible be avoided completely. The reasons are below:

    Secured cards have a specific notation attached to them and reflect bad in your credit report. Your credit report does not contain why you needed a secured card (just because you are new to US doesn't mean you get any points for that) but it definitely contains the fact "A creditor did not trust you and required a deposit."

    In fact, a secured card can cause you harm in many more ways:
    1) Future lenders will look at your credit report and say "Once a deposit, always a deposit." Almost everybody will ask you for a deposit, including utility companies.
    2) The secured cards have a maximum limit of around $500. This will almost always reflect negatively on your credit report (having a low limit on any account is indicative of the fact that at some point you were not to be trusted).
    3) A secured card is different than a credit card. It is reported differently. Paying for a secured card in no way shows that you can handle a revolving line of credit equally well. This is because a secured card is treated as a installment account rather than a revolving account.
    4) When you are finally ready for a revolving line of credit and close your secured card, its just a closure of an installment account so all your payment history on a secured card only amounts to paying your bills on time (back to square one)

  • Gravatar
    Cecelia Marvin Friday, December 05, 2008 at 5:51 AM
    credit/debit card
    credit/debit card your credit 101 is very interesting....I am a dinasour at these machines...and my 28 year old tell me what to do all the time they seem to have trouble getting someone to loan them money to buy a house so I was very interested in your credit score article....because we seem to disagree on the good score number and how much to put down and how to raise your credit score all though I have been a member of Debtors Anonymous and debt free for the last 20 yrs. and yes not a home owner so ther are different schools of thought here and since I place people before things I really valued your information and found your site easy to use..thanks for the help.

  
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