Building your credit history from nothing
17 April 2019
[ guide , life , finance ]

The benefits that come with credit cards in the US are really, really nice, and you can’t do any of that without a good credit history. If you’re going to be living here for awhile, you never know when a line of credit will come in handy. As an expat living in the US, I wish such a guide existed to guide me on how to build my credit. This post is entirely written by me based on my personal experience, and I wish it was somehow sponsored to supplement my bank accounts a bit more so I can stop living like a graduate student.

Before we start, you should probably have some way of paying off your bills without a problem (otherwise, you’d have to weigh the benefits of APRs on different credit cards, and this guide doesn’t consider APRs). Also.. I’m assuming that you don’t have a spending problem :) in which case, it’s probably not a good idea to have n+ credit cards on hand.

Here we go–


Prerequisites

  • Get a bank account with a local bank. I landed in a city where there are no big-name banks (think Chase, BoA, Wells Fargo, etc.), but you should have a relationship with a local bank if you just landed. Go with Chase if you’re in an area where they service (this will come in handy when it comes to credit later), otherwise, just the most convenient local bank.
  • If you just landed in the US and have some sort of paying job, you’re eligible to apply for a social security number (SSN). You must have an SSN in order to apply for credit. If you don’t have it yet, just revisit this guide once you’ve got an SSN.
  • If you can, get a State ID as soon as possible (or a Driver’s License if you know how to drive and can take the test). This will be useful later in dealing with places that require a US ID (Barclays)

Build up your credit

The credit system in the US is derived from a variety of different credit tools, like loans and mortgages. It’s calculated out of 850, which is based on a weighted combination of 6 factors:

  1. Hard Inquiries: Number of times you applied for credit (low impact). Each inquiry ticks off a few marks off your credit score and stays there for 2(?) years, so you don’t want to be blindly applying for credit cards everywhere.
  2. Total accounts: Total open and closed accounts (low impact). They want to see 10+ accounts.
  3. Credit age: Average age of open accounts (medium impact) ideally 5+ years, the higher the better.
  4. Derogatory marks: Collections, tax liens, bankruptcies or civil judgements (high impact). The lower the better.
  5. Credit card use: How much credit you’re using compared to your total limits (high impact). You want to range between 10% - 30%.
  6. Payment history: Percentage of payments you’ve made on time. (high impact) You want this to be at 100%. However, if you miss your payment and pay it back within 30 days of the due date, it won’t register with any of the bureaus and you’ll be fine.

There are three credit bureaus in the US: TransUnion, Equifax, and Experian (the one that got hacked). They all calculate your score, they all have access to your info whether you like it or not. Your score can be available to you through various banks called FICO (Discover has this), and you can monitor your credit there.

If you just landed, you have zero credit history in the United States. You want to begin building your credit history up as soon as you can (See the part on credit age above), even though you don’t really need credit right now. There’s a variety of ways for you to build up your credit, but most of them are unattainable for a poor graduate student. You can do so by having phone bills under your name with a big-name carrier (AT&T, Verizon), or you can do it the traditional way, which I’ll talk about here.

Step 1. Secured card

A secured card is where you deposit $N of your own money, and the bank gives you a credit line of $N, and then you use it as a credit card as usual.

The trick here is that you should have at least 2 x $N, since you’re going to be depositing half and you are gonna be able to spend up to that amount. However, by US credit spending standards, you should not exceed spending more than 20-30% of your credit line – that means, have a credit line of $N, really spend 0.3 N. You also want to maximize $N, because at the end of the first year when your deposit refund is returned, $N will become your standing credit line.

Recommendation:

  • Discover. This gives you 2% cashback on gas and restaurants and cashback match at the end of the year (that means really 4% back on restaurants). BONUS: if you’re a student, I think they give you a Good Student $20 cash back if your GPA is above a certain level.

At some point, Discover will refund you your security deposit (woohoo! unexpected money back!) and now you can move to step 2. This should take about 6 months to a year, depending on your behavior. Your credit score should be somewhere between the 650 - 730’s.

Step 2. Easy intro cards that have good benefits

Here’s where you can begin shopping around for cards, but you’re still limited. At this point, you want to look at where your max spending goes, and you want to apply for a card that will allow you to maximize rewards in that category.

  • First thing you need to do, is change your Discover card to a Discover it Cash Back card. This is a 5% rotating category card, and you get 5% back in rotating categories each quarter.
  • Second thing: Sign up for Credit Karma (or Credit Sesame) and monitor your credit!

Now, you’ll likely want to apply for a low-risk, no annual fee card. Some classic examples with targeted categories include:

All purchases:

Notice how I didn’t mention any Chase cards on here, just because Chase is notorious for having their own credit rating system (not the listed 3) and one of their binary factors for approving/rejecting is “Have you had credit for at least two years?”.

Travel
If you need to travel, you probably need a no foreign transaction fee card. Almost all of the more premium cards will offer this, but not a lot of lower tier cards offer this benefit. There are a few that do:
  • Discover has no foreign transaction fee. However, it runs on the Diner's club/JCP network, so not a lot of places will take it (Europe, south east Asia especially). So you want either a Visa or a MasterCard.
  • Capital One Quicksilver (is either MasterCard or Visa, depending on what you get) doesn't have FTF.

Step 3. Get to know a few more cards

After one of two of the above cards, you want to upgrade to a few more nicer benefit cards. Assuming you’ve had credit for one, one and a half years at this point, Here’s where you can look into having some nicer (annual fee) cards, or some other cards that may be harder to apply for.

Some nice no-annual fee, cash-back cards that I like:

Chase cards
So if you have had a banking relationship with Chase, you can go into a branch and apply for a credit card before your 2 years (which is why if you live in a city with a Chase branch, you should definitely go open a Chase account asap). Depending on how long you've had the relationship for, you can either go open a Freedom- card (non-premium) or Sapphire- card(premium). If you want to maximize your rewards, you should get one Freedom and one Sapphire, but if you're just trying to get one, Sapphire is harder to get depending on your credit history.

There are a ton of fine lines regarding Chase cards, notably the 5/24 rule and the 2/30 rule, as well as combinations of cards in order to maximize the redeeming value of the Ultimate Rewards (UR) points. r/churning has a detailed thread dedicated to Chase cards.

TL:DR; if you are into churning, read all of these, and plan to get your Chase card(s) first.
A special note on Visa cards
Visa underwrites cards that come in three tiers:
  • Visa
  • Visa Signature (min credit limit $5k)
  • Visa Infinite (min credit limit $10k)
Each of these has their own set of benefits that come with the card, but the most notable difference is the credit limits allowed on each one of those cards. Chase cards are all Visa cards, and Freedom- are Visa Signatures, and Sapphire- are usually Visa Signatures (Preferred, CSP) or Infinite (Reserve, CSR).

Step 4. Graduate to some premium reward cards

At this point, you’ve had 2+ years of credit history, your score is comfortably sitting above 750+, and you’re looking to maximize your rewards. Most of the premium cards has reward in the form of miles, but if you don’t travel a lot, you might want to look into some other cards. Since you’re looking into a premium card, they usually have an annual fee associated with it. Some of the most talked about ones are:

For travel rewards, definitely the famous Chase Sapphire reserve. So many people I know rave about it, which is kind of ridiculous considering it is a credit card. It does have nice benefits:

  • Chase Sapphire Reserve $300 Travel credit, 3x points travel dining worldwide, PriorityPass lounge passes, primary coverage for Auto Collision Damage Waiver, 50k bonus points, $450 AF. Even though it’s a $450 AF, you get $300 travel credit as soon as you book a flight with it, so it’s technically $150 AF.
  • If that’s too much, similar benefits are provided by the Chase Sapphire Preferred 2x points travel dining worldwide, primary coverage for Auto Collision Damage Waiver, 60k bonus points, $95 AF.
  • The American Express Platinum Card is one that is comparable to CSR, but if you read the fine lines, it may not be worth it.

Cash back:

  • Capital One Savor 4% dining & entertainment, 2% grocery, free Postmates Unlimited for 1 year, 8% back on Vivid Seats til May 2020, $500/$3k Bonus, $95 AF.

Basically at this point you’re on your own for the rest of your credit journey! If you’re interested in churning, r/churning has an extensive wiki and a list of links, and I personally enjoy Doctor Of Credit as a straight-forward, no-bs blog on credit card updates.

Some tips
  • ALWAYS pay off your bill in full when you're building up your credit. If you're reaching maximum limit, pay it off whenever it approaches the 30% spending limit mark.
  • Try to keep spending below 30% of your credit limit.
  • Never miss a payment (set up AutoPay)
  • Never apply for more than 5 cards in a year (esp. when you're starting up, you're gonna miss a lot of opportunities in the future)
  • Don't close any credit cards! If you don't want to pay annual fee on a card, downgrade it to a no fee card. You should be able to do this, but call the bank first.