Establishing credit as an immigrant to the US or after bankruptcy takes a little planning. Credit files, which are the records that lenders check before granting you a credit card or loan, are not automatically established for everyone. Before applying for credit for the first time, you will likely need a credit file. Only certain accounts report your monthly credit use to the three credit bureaus, Equifax, Experian, and TransUnion. That reporting establishes your credit file for other lenders to check before approving or denying credit cards or loans.
Furthermore, the reporting action is up to the lender whether to report or not. Just because something is a loan product does not automatically mean it will appear on a credit report. To make matters worse, opening a credit card or loan can be next to impossible without a credit file. Is this a situation of which comes first — the chicken or the egg? How can young adults, immigrants, and bankrupt people establish a credit file?
The Best Method of Establishing Credit: The Piggyback
Yes, similar to a specific season finale of Stranger Things on Netflix, a “piggyback” is an excellent shortcut to getting where you need to be. We call it a piggyback because you will share someone else’s credit account to benefit yourself. It’s the simplest and easiest way to establish a credit file and is a smart move for parents who want to help their children get ahead in life. However, the piggyback method is not limited to family members. Any person can add any other person as an authorized user to a credit card. Upon doing so, the person added will then benefit from the (hopefully well-maintained) credit account history. The person added will also then show that credit card as a credit account on their newly established credit file!
If you don’t have any friends or family members who are in a position to add you as an authorized user, then there is another less recommended option: pay for a stranger to do so. This is called selling or buying credit “tradelines.” There are several websites where you can pay a stranger to add you as an authorized user for a few months to establish or repair your credit file. If this sounds odd to you — it is! You will not receive a credit card from the stranger you hire. The goal is to piggyback onto the stranger’s credit card for a short time to establish or repair your credit file. Technically, doing this is entirely legal. Certain banks may frown upon it, mainly from the stranger’s perspective. As a buyer who is piggybacking, you are in a safe position.
The Regular Method: Opening Accounts
If you are not in a position to piggyback on someone else’s credit card, then take the traditional route. First, make sure you open a basic bank account and then go from there. That same bank may be able to issue you a credit card once you have enough time with them. Once you have some time using a bank account, regular lenders will look to other aspects of your life to validate your creditworthiness. Without a credit file to reference, these other aspects may include employer history, address history, utility history, and rental history. Keeping good standing and records for each of these will help streamline the process of opening a credit card or loan account. We call this the ‘regular’ method because this is the way credit files are traditionally established in the first place.
Traditional Methods of Establishing Credit
- Your bank. Your bank knows you and your existing bank account history already. Therefore, your bank is the best option to open a starter credit card if you lack an existing credit file. Opening a credit card with your bank will likely establish credit in your name, including reporting to the bureaus. Before opening the card, be sure to check with your bank that they will report your monthly credit card usage data to the credit bureaus.
- A big-name store that offers a store card. Store credit cards are usually not attractive. They have small credit lines and generally do not have great benefits. Some store cards are beneficial, however. The “best” standard is a 5% cash back on anything you buy. Target’s Redcard was the first to offer this, and other retailers have followed Target’s lead. Amazon’s Chase card also offers 5% cash back on everything, although you must be a prime member. Non-prime members only get 3% cashback. Being smart with rewards can be a huge benefit.
- Secured credit card. A secured card means you must keep money on deposit to use the card. Unlike a regular, unsecured credit card, the lender is floating the funds based only on who you are. There are two reasons why a secured credit card is the least attractive option. First, secured credit cards force you to park money on a deposit that you cannot use for anything else. Second, although it is called a ‘credit card,’ the card itself does not necessarily establish credit for you. However, some lenders let you convert the card to a regular, unsecured card after some time.
Once you have established a credit file, maintain good credit to have an excellent credit score of 800+!