You know that credit is important, but how do you build it and how do you use it to access capital?
Introduction to Financing
You can build credit and access financing as an independent contractor or small business owner regardless of immigration status. This topic will provide you with a foundational understanding of credit, why it’s important, and how to build credit and use it to access capital.
Contents
End of Section
What is Credit?
It can be difficult and confusing to navigate credit without immigration status or eligibility for a Social Security Number (SSN). However, it’s important to know that even if you do not have a SSN, an Individual Tax Identification Number (ITIN) is an alternative that allows you to build credit, open a bank account, and file your taxes.
Contents
Why credit matters
What is Credit?
Credit & Immigration Status
Why credit matters
So, you have a great idea for a new business or you want to start working for yourself. What things do you need to start delivering products and/or services?
Maybe you want to lease an office space, purchase a phone plan, or obtain a new computer. You may not have cash to purchase these things outright but you need them now to begin earning money.
This is where credit comes into play.
What is Credit?
Essentially, credit represents your willingness and ability to repay debt and allows you to borrow money. It’s a powerful tool in your financial toolbox that helps you get the things you want now based on your promise to pay later. Having good credit is important when you need to qualify for a loan or finance a large purchase.
Credit & Immigration Status
We know that gaining credit without immigration status can be extremely difficult and confusing. However, there are credit-building and financing products available with this in mind.
The following sections are aimed at providing you with the background information necessary to understand how credit works as well as actions you can take to build healthy credit and start accessing capital.
Starting a business and/or independent contracting are opportunities for anyone, regardless of immigration status, and credit is a tool available to help you achieve your goals.
End of Section
Credit Score
Credit is all about building and maintaining trust in your ability to repay debt. Imagine you are having dinner at a local hometown restaurant. When you receive the bill you realize that you’re short on cash and ask the waiter if you can pay later. The waiter kindly agrees because he/she knows you and trusts that the bill will be paid. However, what if you are not in your hometown and you are a stranger to the waiter, chef, and owner? It is necessary to have an agreed upon way to prove your trustworthiness.
Contents
Where your credit score comes from
Taxpayer Identification
Individual Taxpayer Identification Number (ITIN)
Where your credit score comes from
Today, in the US, there are three key institutions that are responsible for tracking and quantifying your trustworthiness: Equifax, Experian, and Transunion. Together, these three institutions assemble a record of how well you have repaid debt in the past and send this information to two primary credit scoring companies: the Fair Isaac Corporation (FICO) and VantageScore.
Both companies use this information to assign you a credit score ranging from 300 to 850. A credit score between 580-669 is considered fair and a score between 670-739 is considered good. The closer your score is to 850 the better, allowing you to access better financial products with lower interest rates so you won’t have to pay as much back.
However, most lenders only look at your FICO score when assessing your creditworthiness, so be sure to use any free VantageScore reports you might get from websites like mint.com and creditkarma.com only as a guideline.
Taxpayer Identification
The three credit bureaus listed above, banks, and other lending institutions need a way to identify individuals and track credit information across all systems. The Social Security number emerged as the means to this end.
Whenever you complete a credit card application, the lender will ask for your Social Security number to look up your credit report.
Lenders also use your Social Security number to report payments, balances, and other credit details. Businesses use an EIN, or Employer Identification Number, for this purpose.
Individual Taxpayer Identification Number (ITIN)
But what if you don’t have a Social Security number? In that case, you need an alternate tax ID, such as an Individual Taxpayer Identification Number (ITIN).
The ITIN is a social security number alternative used by the IRS to account for tax returns and tax payments of resident and non-resident aliens, regardless of immigration status. You can build credit and access your FICO credit score using an ITIN.
We will go into more detail about ITIN and how to apply for one in the following section: Building Credit History.
End of Section
Your Credit Report
It’s easy to forget about something like your credit score in the hustle of everyday life, but it’s important to check in on your score from time to time. You don’t want to wait until you are applying for a needed loan to find out that your credit score isn’t where it needs to be.
Contents
Accessing Your Credit Report
Understanding Your Credit Report
Accessing Your Credit Report
The three credit rating institutions provide you access to a free credit report once a year. If you have a social security number you can request your report in one of three ways:
- AnnualCreditReport.com
- Mail in a paper request form
- Call 1-877-322-8228
If you don’t have a social security number you will need to mail in the paper request form and can leave the social security number section blank.
Once you have your report be sure to check that your personal information is accurate. If you find errors, call one of the rating agencies to dispute specific information on the report. The report will give you detailed information about your credit history so you can see how you are doing all in one place.
Understanding Your Credit Report
You are probably wondering what goes into your FICO credit score and how you can achieve and maintain a good score. The truth is that FICO doesn’t share their exact credit score formula with consumers, but what they do tell us is what guidelines they use and what goes into each guideline category.
Payment History (makes up 35% of your total score)
This is the most important factor in determining your credit score. It refers to how often you made debt payments on time in the past. In order to ensure a high credit score you must make bill payments on time. Late payments will continue to reflect in your credit score for up to seven years. Consider automating payments as one way to reduce the risk of late payments, or calling customer service to work out grace periods and avoiding late fees.
Amounts Owed (makes up 30% of your total score)
The amount you owe represents the total amount of unpaid debt. Having a large amount of unpaid debt is a concern for lenders. An additional factor in this category is the percentage of money spent in a given line of credit. Try to keep the amount you owe on lines of credit such as credit cards to 30% of the credit limit or less.
Length of Credit History (makes up 15% of your total score)
The sooner you begin to establish a credit history the better. Lenders like to see that you can stay on top of your debts over a longer period of time.
New Credit (makes up 10% of your total score)
You might think that applying for a bunch of different lines of credit or opening up multiple credit cards is harmless. Sorry, but it’s really important to be selective about your credit applications. Remember that store credit card you or your family signed up for to get a discount on your purchase? That probably cost you a few points on your FICO score. Going after many lines of credit raises concerns about why you need so much credit from a financial standpoint. Limit the times you apply for new credit to one or two times a year at most.
Types of Credit Used (makes up 10% of your total score)
Lenders want to see that you can manage and budget for different types of credit. You can do this by opening different types of credit such as a credit card, an installment loan, and utility bills.
End of Section
Secured Credit Cards
Check with your local bank to see if they provide a secured credit card option. This service allows you to use your own cash as a line of credit. You make purchases with your secured credit card and make payments as you would with any other type of card, including interest. The bank will report your payment history to the credit bureau and after a year of successful payments they will return your cash and transition your card into a regular credit card.
Contents
End of Section
Accessing Credit
Now that you know what credit is all about you might ask “what if I don’t have credit yet but I still want to start a business and need to borrow money?”
The first thing you should do if you are ineligible for a SSN is apply for an ITIN. You can complete your ITIN application through the Internal Revenue Service by filling out form W-7 - Application for IRS Individual Taxpayer Identification Number. This number does not authorize work in the US or give you eligibility for Social Security benefits, but it does allow you to open bank accounts, establish credit, and file a US tax return.
While this may seem like a hurdle, it is well worth the effort to take charge of your US credit profile as good credit will give you more freedom and flexibility in the long run. Make sure all of your good borrowing activity gets reported to the credit bureaus and recorded to your credit report using your SSN or ITIN.
Undocumented immigrants in the U.S. face a number of challenges, but building credit doesn’t have to be one of them. Avoid predatory lenders, such as payday loan companies and other high-interest, high-fee loans, and seek out legitimate banks and credit card companies. If you are just starting out with your credit there are two great products that you can access to start building your credit history.
Contents
Lending Circles
Lending Circles
LendingCircles is a zero interest social loan. It works by bringing a community of borrowers together to formalize their lending and to borrow with one another. This is a safe way to access money because it requires approval to participate, uses participants’ checking account funds, and is backed by a reliable organization that insures your money. These are small loans and are intended to be your first step in building credit. Most participants exit the program with a credit score of around 600. You can access this program through the Mission Asset Fund website
End of Section
What Lenders Look For
Let’s say you’ve decided to approach a lender about borrowing money so you can grow your business. You can use your Individual Taxpayer Identification Number (ITIN) to build credit and access capital even if you are ineligible for a Social Security Number (SSN). The ITIN is a social security number alternative used by the IRS to account for tax returns and tax payments of resident and non-resident aliens, regardless of immigration status.
Your credit score is a key component in how lenders will assess your eligibility for a loan, but it’s not the only factor. Lenders look at five primary factors:
- Credit: how likely are you to make payments on time and pay off the loan?
- Liquidity: do you have assets such as stocks, mutual funds or accounts receivable that you can turn into cash quickly to pay back your loan?
- Collateral: you might be asked to provide something of value such as real estate, equipment or inventory to back your loan.
- Capital: what is your income and available cash?
- Character: how responsible have you been with your past debts?
Link to check your credit score: AnnualCreditReport.com
Contents
End of Section
What Borrowers Should Look For
It might seem like lenders hold all the power, but the decision making power is in your hands as well. Watch out for predatory lenders who offer “easy” loans with unreasonably high interest rates or unrealistic pay back periods. Pay close attention to fees and interest rates when you go to apply for a loan.
Even though it may seem like a hurdle it’s actually a good sign if a lender is asking you a lot of questions because it means they want to make sure you are making a financially sound decision. As a responsible borrower you should be looking for four pieces of information from your potential lenders:
- Terms & Conditions: terms include the interest rate, monthly payment requirements, associated penalties, or special repayment provisions.
- Interest Rate: pay attention to the interest rate and whether it is fixed or variable.
- Fees: there may be start-up fees, late fees, or other administrative fees.
- Client Services: make sure your lender is someone you want to work with long-term and that they treat you with respect.
Contents
End of Section
Small Business Capital
You may be wondering why your personal credit history matters if you’re looking to borrow as a business rather than for something personal. A lot of times when you are just starting out as a small business, lenders will want to look at your personal credit history.
Fortunately, there are a couple of well known organizations that aim to help small businesses access capital.
Contents
Small Business Administration (SBA)
Alternative Lending Options
Small Business Administration (SBA)
One of the most well known and trusted is the Small Business Administration (SBA). This is a nationwide organization that is well connected with many helpful local resources and services. If you do not have a social security number you can still access SBA loans but you will need a cosigner for your application.
Alternative Lending Options
Alternatively, there are many lending options that do not require a SSN or co-signer such as business credit cards from local banks, Community Development Financial Institutions fund, and Opportunity Fund. You can also visit lendingcircles.org to access potential capital as well. A chart with more details about different funding options is included below. As your business grows you will be able to build business credit just like you build your personal credit.
There are also a number of helpful resources available through federal and non-profit agencies (see resources section).
End of Section
Additional Resources
Contents
Credit Resources
Accessing Capital & Lending Organizations
Credit Resources
Accessing Your Credit Report
Call 1-877-322-8228
Applying for ITIN
https://www.irs.gov/individuals/how-do-i-apply-for-an-itin
Credit Education
https://www.consumerfinance.gov/
Receive financial coaching
https://www.creditbuildersalliance.org/find-a-member
Disputing Credit Errors
https://www.consumer.ftc.gov/articles/0151-disputing-errors-credit-reports
Business Credit
https://www.sba.gov/blogs/how-build-business-credit-your-start
Accessing Capital & Lending Organizations
As a certified Community Development Financial Institution (CDFI) by US Treasury, NALCAB lends to non-profit organizations that promote economic mobility in Latino communities by building affordable housing, investing in small businesses and strengthening family financial capability.
https://www.opportunityfund.org/
Provides loans to low- and moderate-income immigrants, women, and other deserving, but underserved small business owners.
Provides loans to individuals and small businesses.
Provides crowd funded 0% interest loans.
Community Development Financial Institutions
While the CDFI Fund does not make loans directly to individuals—nor does it directly finance specific projects—the CDFI Fund does provide financing to CDFIs throughout the country that, in turn, provide financing to individuals and small businesses.
Immigrant Rising’s Credit and Financial Capital Guide
This guide provides basic information about building credit and how to access financial capital for yourself and your business, regardless of immigration status.