When I moved to the U.S. from my hometown of Hangzhou, in China, to pursue my undergraduate degree, the thought of establishing a credit history wasn’t even on my radar. I was, after all, an international student from China, where day-to-day credit card use had only recently caught on.
It wasn’t until I returned to the U.S. a few years later to pursue my master’s degree in Chicago that I realized I’d need to establish credit if I planned to launch my career in the States.
Just one year after I opened the card, I already had a solid FICO score – 720, to be exact. This score landed me safely in the “good” credit range, meaning I probably would not have trouble getting approved for new credit. I still had work to do if I wanted to get into the “very good” credit category, which starts at 740. But as a credit card newbie, I was not disappointed in my progress.
Here’s how I did it.
I selected the right card for my needs
I wish I could say I diligently researched credit cards to choose the best offer and best terms, but honestly, I just got lucky.
Shortly before graduate school started, I visited friends in Iowa. When we were about to split the bill after dinner at a Japanese restaurant, I noticed that all my friends had a Discover card with a shimmering pink or blue cover. The Discover it® Student Cash Back was known for its high approval rate for student applicants, and had been popular among international students.
I thought, “Oh, maybe I should get this one, too.”
One of the friends sent me a referral link that very night. I applied and got approved quickly. We both received a $50 cash-back bonus after I made my first purchase — an iPhone — using the card through Discover’s special rewards program. I even received 5% cash back from the purchase.
Besides imposing no annual fee, the card had other perks, such as rewarding me with a $20 statement credit when I reported a good GPA (up to five consecutive years), letting me earn 5% cash back on purchases in rotating categories and matching the cashback bonus I earned over the first 12 months with my account. For me, it was a great starter card, but there are plenty of other options out there.
I also could have explored other options of establishing credit, like opening a secured card, for example, which would have been a smart option if I hadn’t been able to qualify for the Discover it student card.
I never missed a payment
Despite my very limited financial literacy at the time, I attribute my strong credit score to the old, deeply ingrained Chinese mentality about saving and not owing.
I never missed payments, and I always paid off my balance in full each month, instead of just making the minimum payment. I didn’t want to pay a penny of interest.
Credit cards carry high interest rates across the board, but student credit cards generally have some of the highest APRs. This is because lenders see students like me — consumers without much credit history — to be risky borrowers, and they charge a higher interest rate to offset that risk.
It wasn’t until much later that I learned payment history is critical to good credit. In fact, it is the biggest factor there is, accounting for 35% of my FICO score.
I was careful not to use too much of my available credit
My friends with more experience advised me to use as little of my available credit as possible. They warned me that overuse had hurt their credit scores in the past. This didn’t much sense to me, but I followed their advice, for the most part diligently.
I later learned this is almost as important as paying bills on time each month. Your utilization rate is another major factor in your FICO score. Credit experts urge cardholders to keep their credit utilization ratio below 30%. The lower, the better.
That means if you have three credit cards with a total available limit of $10,000, you should try to never carry a total balance exceeding $3,000, and you really should aim for much lower than that.
I beefed up my score with on-time rent payments
Keeping in mind the importance of not maxing out my credit card, I never considered paying my rent with the card. In fact, some landlords charge credit card fees for tenants who try to pay with plastic.
But I did find a way to establish credit by paying rent using my checking account.
I paid rent to my Chicago landlord through RentPayment, an online service. RentPayment gave me the option of having my payments reported to TransUnion, one of the three major credit-reporting agencies (the other two are Experian and Equifax). Because I knew I’d always pay bills on time, I signed up for the program.
This likely helped me improve my credit mix, another key factor influencing a credit score. The more types of accounts you show on your report, the better your score can be — if you make all your payments on time.
Yes, I made mistakes. This was my biggest one
My first foray into the world of credit wasn’t completely blip-free.
The only thing that hurt my credit, besides my short credit history, was that I had tried signing up for a Chase credit card, along with other ways to finance my iPhone, just a few days before I applied for my Discover card.
None of the other banks approved my applications, and my score went down at the very beginning, due to the number of “hard inquiries” against my credit report. Hard inquiries occur when lenders check your credit report before they make decisions regarding your application. Having too many inquiries in a short period of time can result in a ding to your credit score.
I’ve learned my lesson, though, and I’ll be cautious in the future when it comes to applying for a lot of credit in a short time period. Overall, it should be noted that you should not be afraid to apply for new credit — even when hard inquiries do hurt your score in the short term, it typically isn’t disastrous, and your score should recover fairly quickly as long as you are a responsible user of credit. Having more available credit can also help your utilization rate — as long as you don’t increase your charges, of course.
You can also check to see if you have prequalifed for any credit cards without triggering a hard inquiry.
If you’re new to the world of credit cards, consider taking the steps I outlined above, and you, too, may have a healthy credit score before you know it.