Fatbrit's Guide to Credit and Finance
Original BE Article ©Fatbrit
How US banks work
Your first task on arrival is to open a bank account. My advice is to choose one of the big boys such as Bank of America or Bank One, not the 'mom & pop [GB: small]' ones or the credit unions. For the first 90 days your account will be 'red-flagged' -- there's nothing you can do about this but wait it through. The bank is waiting to see whether you're just trying to cash a forged cheque [US: check] and run. This means that everything will take a lot longer to clear. The banks run a 'bad boy/girl' list called ChexSystems. At all costs make sure you keep yourself off this little horror, otherwise you'll find it almost impossible to open an account anywhere.
Some other things that aren't quite what you're used to:
- As a result of the "Check 21" changes to the retail banking system in the US, cheques now mostly clear overnight, though larger ones, or ones drawn on small banks and/or banks in distant parts of the country can take a week or more to clear. Don't spend the money till it's fully cleared into your account. You'll often see the amount marked as 'pending'. I think they want us to think it's floating around in the ether somewhere but the reality is that it's sitting earning interest to pay the salary of that sweet-smiling banker you met. Moreover they're hoping you'll try and spend it before it's cleared so they can charge you an overdrawn fee to take care of her bonus as well. Don't rely on the figure given on the website or through the phone banking -- it isn't always accurate
- You don't have the protection afforded by the 'Direct Debit' system at home. Once any company has your bank details they can dive into the account and extract willy-nilly. It's very difficult to stop this, and the banks can be very unhelpful -- it's not our problem they'll tell you. Frequently, the only solution is to close the account and start afresh. Shouting 'Reg E' sometimes helps; no idea why!
- Cheques aren't usually free here, you have to buy them. However, you don't have to order them from the bank. Also, you should have your address printed on them. Write the cent part out as a fraction, e.g. 'Twenty-seven and 69/100'. There's an extra line on the cheque marked 'Memo'. Use this for the account number you're paying, to record what you're paying (e.g. Rent, Nov 03) or special instructions.
- Dates on cheques are not worth the paper they are written on! Unlike a postdated UK cheque, where the cheque cannot be posted until the date you specified on the paper, in the US this date is not binding. Which means that if a company has your cheque in their possession, there is nothing to stop them submitting the cheque to the bank. The cheque will clear (there is no validation on the date). So be careful about trying to manage cashflow using this technique.
- Nowadays, some companies also convert your cheque to an electronic debit. This can be confusing if you are expecting to see a cheque being debited from your account.
Sign up and use your bank's bill pay service, as most accounts are processed monthly and it'll save you the hassle of buying stamps and writing out cheques. Despite it's electronic nature, allow a good week for your payment to be made.
Credit, credit, my kingdom for a credit score
Okay, look at it this way: your status back in Blighty was directly linked to your accent, schooling, whether the Fotherington-Smythes invited you to their little soiree, or even whether HM has graciously dished out the gongs in your favour. Unfortunately but deservedly, the foremost measure of your social status in America is your credit score. Moreover, this number will affect not only the rate at which you borrow money (would you rather pay 0% for a new car or 21%? 5% on your mortgage or 10%? 5% on your credit card or 30%?) but also your insurance costs ($2000 or $1000 p.a.?) and, possibly, your job (yes, your employer might also ask to see it!).
To have a credit score, you must possess a kosher social security number. There's no way round this. There are three national credit bureaux: Experian, Equifax and TransUnion. There is also a rather shadowy one called Innovis, the subject of much speculation in this conspiracy-driven nation. You will also see mention of your FICO (Fair Isaac Corporation) score. This is the most commonly used method to condense your credit score into a single number ranging from 350 to 900. A good score is considered to be 720 and above. Each of the major credit unions may and probably will report your credit slightly differently, i.e. you'll actually have 3 slightly different credit scores. To solve this little inconsistency, lenders will calculate a 'tri-merged' score when you're taking out a major loan, i.e. the average score from all three major bureaux.
Only credit will build your credit score, i.e. you have to borrow money and pay it back to get a credit score. Paying the rent, utility bills can not and will not build you any credit. However, failing to pay these or paying them late can reduce your credit.
This article may help explain how a FICO score is calculated: 
How to build credit
This is my story of how we built our credit up to a reasonable score over a period of three years. My wife and I arrived in the US from central Europe with two suitcases each, around $20k in cash, permanent resident status but no jobs. Obviously your circumstances may be different and you should adjust accordingly. For those marrying a US spouse, life will obviously be a lot easier as you can piggyback on your spouse's credit while establishing your own. If you're like us, you're currently stuck in the classic catch-22: no credit, no credit score; no credit score, no credit. We need to build a credit history with the bureaux by progressing through the loan types in this order: revolving loan (e.g. credit, store or gas card), instalment loan (e.g. car loan) and finally the crème de la crème, the real estate loan. This should all be possible in around 2 to 3 years giving you a Fico of 720+.
Go to the bank where you opened your checking account and ask to open a Visa or MasterCard 'secured card' with a credit limit of anywhere between $300 and $1k, any more is a waste of funds. Do not use those mailers you get in the post offering you an unsecured card for $250+ in fees -- they're a waste of time and are more likely to damage your credit than help it. You may find you have to wait until the 'red flag' comes off your account after 90 days. Whatever you do, don't delay any longer than necessary as the most difficult factor you are facing in building up your credit is termed 'insufficient credit history'. The bank will require a deposit into a savings account of an amount equal to your credit limit. This money and the account are locked for a period of one year. The card should be free or at minimal cost, but you may need to pay a small service fee on the savings account.
Do not view this card as a credit card because it isn't! Rather, consider it as your first step on that road to credit bliss. You should aim to use around one-third of your credit monthly but never use more than 50% of your limit. The reason for this is that the credit scoring system will flag you as 'over extended' if you use any more than half your limit. It's ridiculous, I know, when talking about such small sums; however, these are the silly rules and we must play their mind-numbing game to reach our nirvana. Use the card at the supermarket (US: grocery store), pharmacy (US: drug store), drycleaners, etc. Do not use it to rent a car or book a hotel room as these purchases will often place a hold on funds in excess of the amount you are charged, which could put you in default on the card agreement. In addition, avoid using it on the Internet or anything else that could produce reoccurring charges, e.g. newspaper subscription or gym membership. (One of the classic rip-offs over here is for a company with your credit card details to keep signing you up for new products and services and charging them to your credit card or bank card -- sure, you'll probably eventually get them removed, but by that stage you'll probably also have defaulted on your card and that's most likely to be stuck on your credit report for seven years!) Be retentive about it! Keep a running total in your wallet, then pay the bill fully immediately after it's posted on line.
This method should cost you less than $20 in fees, no interest charges and is proven to work. Other methods for this initial footing on the ladder include applying for a store card (JC Penny, Sears, etc) or gas card (Mobil, Shamrock, etc). Transferring from a UK credit source (American Express, HSBC and Citi Bank have also been mentioned. As I have no experience of these, I'll leave others to comment on their viability.
American Express Country Transfers division can be reached on +1(801)-945-2048. As detailed above, AMEX can use your account history in the UK to open a new account for you in the USA. However, you must have held the account for a minimum of 12 months before you qualify for the transfer. It is possible to work around this policy. You can achieve it one of two ways (both worked for me).
1. Once you have your SSN, apply for the AMEX card you would like online. You will almost certainly be rejected. Phone the number above, and detail to them your application reference number. They will ask for your UK card number, review your account, and then (hopefully!) over-turn the computer decision to APPROVED.
2. Phone the Country Transfers division above, wait to be told the standard spiel about 'you must have held the account for a minimum of 12 months', then INSIST to speak to a supervisor who can over-rule the policy. Do not take no for an answer. Insist that you are called back with an approval.
Outcomes of above two methods:
1. I had been a customer for just over 11 months, once I spoke to the country transfers division my initial rejection for a Platinum card was over-ruled and an ACCEPTANCE applied. The card was priority mailed by UPS for next day delivery.
2. A manager called me back within 24 hours, informing me that - YES - they could over-rule the policy given my account history and what card would I like. I informed them I had already received the card via #1.
Hopefully the above can help those with AMEX cards in the UK with excellent account history who don't quite meet the 12 month minimum opening policy.
Okay guys and gals, time to move on to step two. You may notice we're working slowly. Not our choice, we have to follow the system. It's now six months on. You've got your single secured credit card with a reputable institution that posts its data to the credit bureaus in a timely manner, you've run the account perfectly, you've wisely ignored all other solicitations for cards as you don't want to be flagged as 'desperate for credit'. You will now have a Fico score. It's a pathetic and miserable one, but one nevertheless.
We need a nice spread of credit accounts on our report and the next one to head for is the car (US: auto) loan. Hopefully, you've been saving your money. Get rid of that banger you bought when you first arrived and move up to something half-way decent around the $10k to $15k mark. Why anybody would want to spend any more than this on a depreciating asset is beyond me since we're only a year in and shouldn't have caught the American disease yet! This is going to require some homework. First of all, get yourself over to the best advice possible at Car Buying Tips and learn how it all works over here. Sort of slimy, slimier, slimiest if you get the drift. Read it all and follow its advise before you go anywhere near a dealer.
Now on to our modification. We need to find a 'first-time buyers auto loan with no prepayment penalty'. You'll probably have to stick with a main dealer for this one, although there's no harm in trying the Internet lenders (ELoan, Capital One, etc). Do remember that each loan application on your credit report will ding your score by around 5 points. Multiple applications within a two-week period for the same type of loan should, in theory, only produce a single 5-point fall. Therefore, choose your dealer and purchase before allowing anybody to run your credit. If you've given any of them your social security number it's too late, they'll have run your credit faster than an Italian government stays in power. Some may require at least one-year's work history, with others you will get away with as little as 6 months.
Here's the game plan but don't tell the lender or dealer (as they often make more profit on the loan than the car and will get upset): we want to pay the lowest amount in interest charges but rack our credit limit up the highest. Expect an interest rate of anywhere between 14% and 21%. Aim to put a minimum of 30% down; then pay the loan off as quickly as possible. The ideal situation is to have the money up front but still take the loan. Here's an example: Car costs $12k, down payment $4k (enough to make then feel very [US: real] secure), so there's $8k out on the loan. Expect the paperwork for paying the loan to come through around 6 weeks after taking out the loan. As soon as you've got the payment details, make you first payment as $7400, clearly marking your payment 'Extra payment to principal ONLY'. Then make 5 monthly payments of $100 each, finally closing the loan out on around the seventh month with the accrued interest. There shouldn't be any problem with this as in my experience you don't need to make the minimum payment every month if you're ahead of the payments, unlike, for example, a US real estate loan. The reason for keeping the loan going for more than six months is to balance receiving a good score against minimal interest payments. Any less length in the loan and it won't count towards your score. Total cost in terms of interest and those nasty little fees that they oh-so love (e.g. 'releasing the title') is probably less than a hundred or so greenbacks [GB: dollars]. But the future savings you'll look forward to on starting to have a good credit score are infinite.
Alternatives to this method might be a furniture loan, taking a home equity loan if you had enough lolly to buy your des res [US: home] with cash bought over, but I haven't tried these methods.
By this time, we're around 18 months into our quest, time to start some consolidation and tidying up. Its time for our first, real land-o'-the-free [GB: Right, yeah!?!] credit card. My personal recommendation is a Discover Card since they seem to be accepted most places over here, issue an initial workable credit limit, reasonable rate, and are only moderately (rather than the more usual severely) incompetent. Whatever you choose ensure that it's a prime credit card company, and remember at this young stage in your credit you're only going to [US: gonna] get to choose one. Remember, looking desperate for credit hurts your score. Amex Blue, Chase, Bank One, Bank of America, Wells Fargo, HSBC are all fine. Personally, I have grave doubts about Citi Bank. At all costs avoid anything connected with Providian or Household Bank. Do your homework. Good cards have permanent low interest rates (not just 6-month teasers) and no annual fees. If it's listed on the Internet as a card for people with poor credit, it's not for you because that's not the place we're aiming for!
Also, it's about time you checked your credit score at all three bureaux. There are two methods: pay your money (I would recommend directly to the bureaus rather than the overpriced third-party services who try to screw you into a lifelong subscription) or apply for an Amex Triple-Centurion Titanium- Diamond Snobo Card with extra bling bling (GB: Are you people for real?), Mega Rewards and free limo, get rejected, then use the rejection letter to demand a free copy of your credit report. The former method will cost around $30 (unless you live in a socialist [US: liberal] state), the latter gives you minus five of that hard-won Fico score! Your choice, as in-your-face American advertising so often puts it. Now's the time to clean up any mistakes on the records they hold about you -- there's plenty of advice on the Internet for this.
At this time we should be in possession of two credit cards: the initial secured one and a swanky new real one. As soon as the secured one's year is up, liberate the lucre from the savings account, call them up and ask them to raise your credit limit, and now you can use either card for renting a car, booking a hotel, etc. Just be sure to pay on time and never use more than 50% of the available credit limit, period [GB: full stop]. Now, no more loan applications for a good six months while preparing for the final hurdle.
Real Estate Loan
Are we ready to enter the big time, the great American dream? (Yes, you're right. It's called a dream coz it ain't there when you wake up!) You'll most likely need the promising Fico score we've been working on since point 1) and two years consistent work history. Do your homework on the web. Remember that you have good credit and the only blotch on your report is the short history. There are 2 types of loans: prime and subprime. Be aware that many institutions run different arms, e.g. a prime lender like Wells Fargo Mortgage also has a subprime arm known as Wells Fargo Financial. Check your mortgage lender in the search engines. Bad lenders can usually be found by searching for their name + predatory + loan. Also find out whether your loan is likely to be sold and who your loan servicer will be. If you don't believe how important this can be, try a web search for 'ocwen' and 'predatory'! Shop your mortgage round at least 3 different lenders at the same time. Again, in theory multiple applications in a short period of time for the same loan should only produce a single hit on your credit score. An FHA mortgage is worth looking at since the thresholds for qualifying are lower; however, you can only have one FHA application open at one lender. So, if you're going to try this one, triple check the mortgage broker before you let them open the file. This field is full of fees and charges tacked on all over the place. There's nothing really for it but to study. Use your realtor [GB: estate agent] and get him/her to explain them to you as well -- might as well be doing something for that bloated commission. Final piece of advice: never, ever go and look at new houses yourself without your own, trustable realtor by your side -- the ones' provided by the builder would shame a US used car salesman.
Six months after your first mortgage payment, you're creditworthy. Slowly build up a portfolio of quality credit cards, scrap any questionable ones, and bask in the pleasure of lower insurance costs and 0% financing on a new car.
Protecting Your Credit
Having got the credit, you now need to protect it. Identity theft runs rampant over here and, given a chance, there's a long queue of people waiting to use your good credit score to put money in their pocket. More worryingly, there are also plenty of businesses who will happily use the threat of sullying your credit record to blackmail money from you, or they will simply just destroy it anyway through their own incompetence. Don't do business with anybody till you've checked them out [GB: investigated them] -- my personal favourite is Rip off report. Finally, some tips:
- Get a 'cross-cut' shredder for personal information.
- Check your credit report every year. A good additional check is to watch for the APR interest rate on your credit card statements unexpectedly jumping up. This can happen when there's a black mark on your credit record.
- Register with all three credit bureaux to stop unsolicited offers.
- Opt out of unsolicited 'convenience checks' being mailed when you open a credit card. Insist!
- Try not to give out your social security number wherever possible.