For immigrant entrepreneurs not accustomed to the US financial culture, credit management may seem a daunting task. Learning from others’ mistakes could make it easier to tackle.
1) Read the Fine Print!
Some immigrants don’t read documents because of the language barrier, while others put too much confidence in whoever asks them to sign.
Unfortunately, this is typical of immigrants coming from countries where bank failures are common and deposits aren’t protected by law. They tend to place more faith in the word of their friends and business partners than financial institutions when it comes to financial agreements, and they don’t feel it’s necessary to closely read documents before signing them.
In the U.S. it’s better to be more pragmatic, especially when signing documents like a credit card contract, said Yleana Garrido, a team leader in asset recovery and credit coaching at Accion USA.She recommends reading the fine print carefully and looking for hidden or other inconvenient fees instead of putting your trust in other people to do the right thing.
“…the earlier you learn from your mistakes, the sooner you get to what you want to achieve.” — José Made, Accion, USA
2) Don’t Apply for Multiple Credit Accounts at the Same Time.
Every time you apply for a new credit card or loan it takes a few points off your credit score, said Kristen Euretig, a certified financial planner and financial advisor at Brooklyn Cooperative Federal Credit Union. She recommends being especially careful with department stores offering their credit cards in exchange for a discount. Your credit is affected every time your application is denied. It doesn’t hurt as much as other things like making late payments. “But if you do it a lot,” she said, ”it adds up.”
3) Don’t Close Several Accounts at Once.
The longer you have a good credit history, the better your records are. So, when you close an account, you may actually damage your credit by shortening your credit history.
“Let’s say you have two credit cards on your credit history. One you have for one year and another you have for 10 years,” said Euretig. “In this case your average credit history is five years, which is a decent amount of time, “she explained. “If you close your 10-year old account, you’ll only have one year of credit history, Euretig said. “That could be negative.”
“Every time you apply for a new credit card or loan it takes a few points off your credit score.” – Kristen Euretig, BCFCU
4) Ignoring the Interest Rate Increase.
The higher the debt, the more interest you have to pay on it. A lot of immigrant entrepreneurs tend to underestimate the impact of high interest rates, Garrido said. This mistake is very common among her clients at Accion USA.
“They fall into the habit of making late payments and they pay whenever they feel like it. It could cause real harm to their credit,” Garrido said.
The bottom line is that in the U.S. credit users need to be more pragmatic. If you are applying for credit for a new business, make sure that the interest rate you’re being quoted isn’t higher than the market average.
5) Co-signing For Others.
A lot of small business owners are denied credit because they co-sign a loan and their partner falls behind on the payment, said Garrido. This mistake is especially common among her Latin-American clients, she said. “They are more trustful,” Garrido explained, referring to entrepreneurs from Mexico, Dominican Republic, Honduras and Peru.
In a typical scenario, a friend asks you for a favor. Frequently, Latin-American immigrants feel obliged to help because that person may have helped them before. However, if the friend defaults or leaves the country, the co-signer then becomes 100 percent liable for the debt incurred, said Garrido.
Garrido tells the story of Italian woman who applied for a loan from Accion USA a couple of months ago. When the woman was turned down, she was surprised to learn that it was because of a good deed she had performed for a friend and former business partner. She had signed to be a guarantor for a $7000 loan for her friend, and now the loan was past-due.
“A lot of small business owners are denied credit because they co-sign a loan and their partner falls behind on the payment.” – Yleana Garrido, Accion, USA
“People are disputing their accounts, ruining their credit because of that one little thing,” said Garrido. “Everything else in her credit portfolio was excellent. Now she’s stuck with consequences of getting that out of her credit,” said Garrido “And it could be very uncomfortable, time-consuming and stressful.”
Garrido encouraged this woman to dispute the account by mailing a formal request asking the bank to validate it. If the creditor doesn’t respond within 30 days, it has to remove the account from the client’s credit history, according to Garrido.
The Sooner the Better
Immigrant entrepreneurs tend to face more obstacles with credit, said José Made, a lending team leader at Accion USA. “They were not raised in the credit environment,” he explained. It’s harder to navigate the lending system when you had a late start in developing credit.
“But the earlier you learn from your mistakes, the sooner you will achieve your goals,” said Made.