10/7/2019

Financial Guides

The Importance of Building Credit for Immigrants

While in many countries using credit and banks is not a safe decision, in the U.S. holding on to cash and not taking steps to build a credit score and take out good debt may do more harm than good for your finances.

Adina Appelbaum

Creator, ImmigrantFinance.com

Why Building Credit is Important for Immigrants

In the U.S., most people can only build wealth by taking certain steps such as buying a home, getting an education, or starting a business. Taking out a mortgage, school loans, or a small business loan almost always requires having a credit score.

Credit doesn’t have to be bad thing. Indeed, building a credit history is one of the best ways for families in America to accumulate wealth and ensure their children are better off than they were. While in many countries using credit and banks is not a safe decision, in the U.S. holding on to cash and not taking steps to build a credit score and take out good debt may do more harm than good for your finances.

Good Debt: Not All Debt is Bad

There is a difference between good and bad debt. Good debt is an investment that helps you increase your net worth or provide value to you in the future. For example, depending on the circumstances, a small business loan that can allow you to grow your business and take it to the next level or a student loan can be good debt. Going into debt to buy items that do not add value over time, such as credit card debt that grows due to shopping for clothes that you don’t really need, can be bad debt.

Good debt can be a powerful investment in helping to build wealth long-term. Making an investment that is difficult today may be well worth it in the future if it can increase the value of what you initially invested for the rest of your life. That is why some people are willing to go into debt to get college degree: they will likely have far more job opportunities and the potential for a higher salary in the future.

Without any credit history, many families are unable to purchase a house, take out loans, or plan for their retirement.

Better Ways to Build Wealth Than Putting Money Under Your Mattress

Despite the benefits of good debt, many immigrants stay away from banking and credit services because they are afraid of financial institutions. They may come from countries where the banks and economies cannot be trusted. It might be common culture – and a necessity – to hold on to money tightly and store it under the mattress.

But holding on to cash can be really risky and actually less safe. If you are robbed, you can lose everything in a second. Also, in countries like the U.S. where financial services can be more trusted, you lose the opportunity to make money on your money through interest payments from the bank and building credit.

Nothing is ever fully guaranteed but the U.S. is one of the safest places in the world to open a bank account to store your money, if you open a bank account that is what’s called “FDIC” insured. FDIC stands for the Federal Deposit Insurance Corporation. If the bank says it’s FDIC insured that means that up to $250,000 of money in a single account will be insured by the federal government. If the economy crashes and the bank can’t actually give you your money back, the federal government will give you back up to $250,000.

Immigrants can open bank accounts by using either a social security number or, if they don’t have one, an individual tax identification number. Opening a credit card is another way immigrants can manage money, which can help them build a credit score, as long as they manage credit responsibly.

How Credit Can Help You Build a Credit Score

By using a credit card responsibly over time, you can build a credit score. For immigrants who are new to the U.S., the best option may be to begin with what’s called a “secured credit card.” These work by placing a deposit while the credit issuer sets a certain spending limit. The deposited cash plays the role of collateral. By maintaining the secured credit card in a proper way, paying the bill on time, and being patient, you may be able to build a healthy credit score with time and eventually seek a regular credit card to further build your credit.

Establishing a credit history through a credit card can have major benefits. It can be nearly impossible to take out a large loan without having a credit history. Lenders want to know they can trust you when letting you borrow money – showing that you have paid off credit before is a good way to address that concern.

What To Be Careful About With Credit Cards

The main thing to worry about credit cards is that they make it easy to go into debt. If you do not pay your credit card bills, the amount you still owe will grow with interest. Credit card interest rates can be very high. Therefore, it is important to pay off your credit card in bill in full every month and live within your means to prevent overspending. That is the only sure ways to avoid credit card debt. If you pay off the credit card every month, it’s like using cash, except you also get benefits such as cash back, travel miles, and, most importantly, building a credit score.

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