In a galaxy far, far away, a famous University recruited a prominent overseas Scholar to a leadership position. There was also a bank with a close business relationship with the University. But when the Scholar wanted the bank to issue him a credit card, he was turned down: he got no credit. This did not make him happy. The Scholar eventually got his credit card, hopefully without having to offer the bank a round piece of precious metal with Latin inscription as collateral. But what can regular mortals, who are not famous (yet), do?

How can we break this vicious circle? It would seem logical for a prospective immigrant to do his homework and obtain a credit card issued by a branch of a bank doing business in both his country and the US. Then, to avoid fees for money transfers and currency exchange, it should be easy to trade in his foreign card for a US one upon arrival. Right? Wrong. For example, Citibank US does not talk to Citibank Germany, despite all the talk about globalization. Anecdotal evidence suggests that only American Express will take the enormous risk and assume that their colleagues abroad are sane businesspeople. Some banks offer premium services which provide help during relocation between countries (including issuing of credit cards). However, they are willing to do this only for their better-heeled customers. For example, the minimum requirement for HSBC’s Premier service is $100,000 in deposits and investments.

Alas, going through the motions of “establishing credit” may be inevitable. Probably the easiest way to do this is to acquire a secured credit card. They are easy to obtain, because the bank is minimizing its risk by requiring deposit of collateral. It then issues a credit card, with credit line typically of an amount equal to that of the collateral. In reality the user of the card is then borrowing his own money, but with a significant side effect. These pseudo-credit transactions are reported to the agencies which collect information on credit holders. You are not an empty sheet of paper anymore, you are now a real, worthy person with a credit history. After one year or so, the bank usually offers to transform the secured card into an unsecured one and returns the collateral. The respectable banks offering secured credit cards include Wells Fargo, HSBC, and Washington Mutual (with annual fees $18 for Wells Fargo and $35 for HSBC and WM).

The information on credit holders is collected by three main private agencies: Equifax, TransUnion, and Experian. Since they can provide this information to any company to which a person applies for credit, insurance, employment (with the person’s consent), or to rent an apartment, it is prudent to know what information is collected, and if it is correct. The credit rating agencies are not only interested in your debt payment moral, but they also want to know how much you earn, how many lines of credit you have open and since how long, what is the ratio of used to available credit, how often you applied for credit and with what result, and more. Each of the three agencies record this information in a separate credit history file. Up until now the credit reporting agencies were providing individuals with the copies of their credit history only for a fee. They were only required to provide the copies for free to people that were unemployed and seeking employment, or if a company, acting on the basis of the report, took adverse action against a person, such as denying an application for credit, insurance or employment. This is going to change soon. Under the Federal Fair and Accurate Credit Transactions Act the credit reporting agencies have to provide individuals once a year with a free copy of their credit record.

In addition to the credit records, the credit reporting agencies also calculate compound scores that express how likely a person is going to pay back their debt based on their financial behavior in the past. These scores—FICO scores (developed by Fair, Isaac Company)—are reported to lenders along with credit record, but are not part of the credit record per se and will continue to be provided to affected individuals for a fee. The exact formula used to calculate them is kept under wraps, but some details have transpired. So, for example, having too many or too few credit cards can negatively affect the score, the optimal number seems to be two to four. Also, apparently it does not look good if the available credit is used up to the limit: used funds should not be more than 50% of available credit, otherwise the score will suffer. Too frequent requests of credit reports from potential lenders also are not looked upon favorably.

Why bother getting a credit card at all if it is so much hassle? It is true that many plain ATM cards (those with MasterCard or Visa logo) offer similar conveniences as their more advanced relatives: freedom from cash and ability to shop online. But many credit cards offer additional advantages: financial flexibility, extended warranty on purchases, travel insurance, and zero liability for fraudulent online purchases. Having credit history is also useful (and sometime required) when renting an apartment, a car, and even when buying a cell phone service.

Resources

Secured credit card FAQ
FTC guide to Fair Credit Reporting Act
FICO score estimator