Why is it important to work on building credit history asap after moving to US on a H1B visa!
It is extremely important to have a good credit history in US. It is used to determine your home mortgage rates, car loan rates, eligibility for leasing home/apartment, insurance premiums (except in some states where it is banned by law) and determine eligibility for credit cards. Your broadband and telecom providers may also use credit history to determine eligibility for certain products. Even some employers check credit history before making job offers!
For someone who has just moved to US, he/she would likely not have any credit history to begin with. This makes it important to take the necessary steps to start building a credit history as soon as possible. Since most banks will not offer unsecured credit cards to people without any credit history, it makes sense to start building credit history asap by applying for a secured credit card. Both secured and unsecured credit cards are reported similarly to credit agencies, and hence will help you get started with building credit. Most banks like Bank of America, Capital One and the like will offer a secured credit card for the amount that you deposit as security. Once you have built few months of credit history by making credit card payments on time, the bank will refund your security deposit and convert your credit card to an unsecured one.
It is also a good idea to check your credit scores every few months. Most banks like Chase, BofA and Capital One offer a free credit score facility that one can sign up for. To get a detailed credit report you can visit annualcreditreport.com and request one free report from each credit reporting agency every 12 months. Detailed credit reports show all open accounts and are great for spotting errors and any fraudulent accounts that may have opened in you name with stolen information. It is not a good idea to use any other less known third-party services to get your credit reports since they may misuse your personal information.
Understanding FICO scores:
Credit scores are made up of following factors:
- Payment history — approximately 35% weightage. This factor is the most important and depends on making credit/loan payments on time.
- Amounts owed — approximately 30% weightage. This factor is dependent on how much credit have you already taken and the utilization rate on your credit cards.
- Length of credit history — approximately 15% weightage.
- Credit mix — approximately 10% weightage. This is dependent on how many different types of credit have you taken. For example, credit cards, car loans, mortgage etc. Having multiple credit types and making on-time payments on all of them is good for your score. (But do NOT take any additional loan just to increase your score!)
- New credit requests — approximately 10% weightage. This factor measures any recent credit requests that you may have made. More the number of such requests, lesser will be your score.
Building a good credit score is just a matter of being vigilant in making on time payments on all your credit accounts. You should pay the entire balance in full once you get the monthly statement and not carry over balances making minimum/partial payments since interest rates on carried balances are absurdly high on credit cards!
As time will pass, your score will continue to improve. It is a good idea to have only credit cards that you will use regularly and gain substantial benefit from. Store cards (like Macys’ and JCP etc) tend to have a negative impact on credit history if one opens them indiscriminately (these also tend to have trap door fees and high interest rates built into them in case you miss a payment or do not pay in full). I recommend steering clear of store cards since it is hard to keep track of these as compared to mainstream credit cards and it is easy to forget to make timely payments. Also, most good credit cards are only made available to users with good credit history, so it makes sense to wait to build some credit history before applying for these better cards. Meanwhile if you keep applying for every store card and pre-qualified credit card offer that comes your way, you credit score will take a hit each time making it that much harder to qualify for good credit cards that offer meaningful benefits.
Good luck towards building an excellent credit history!
