Prosper – Money Smarts Blog

How Canadians Can Establish Credit In America

I actually lived in the US for a couple of years, but foolishly didn’t establish myself financially beyond opening a bank account. I used my Canadian credit cards, never owned property and just lived my life there.

Over a year ago when Prosper.com started up and I wanted to try it out, I wasn’t able to open an account since I didn’t have a US address or any US credit history. I tried a number of ways to get established with US credit and they were all quite difficult. The “official” way to do it is you go to a bank, offer to set up a GIC (they call them CDs south of the border) and an account with them. You then get a credit card with a limit significantly less than the CD’s value (so if you don’t pay your bill they have the CD). I tried to set this up, but the bureaucracy wore me out before I could have it set up.

Department stores, credit card issuers or anyone will just turn up their nose at you when you apply and don’t have any credit (this happened to me everywhere).

There is an easy “back door” which I used (and would suggest to others, this may also work in Canada or other western countries). Basically you use a friend who lives in the country that you want to establish credit in. Together you get a joint credit card, which they’ll be able to easily get if they have any sort of credit at all. The limit doesn’t matter. If your friend doesn’t trust you fully, that’s not a problem, just get the joint card and tell them to keep both cards when they’re issued.

Then you (or your friend) charge things on the card. The amount doesn’t matter, but its good to keep something on the card (buy a latte every month and just pay it off when the bill is due). Almost IMMEDIATELY you’ll be in the credit system and will get a FLOOD of credit card offers. Sign up for one of them, and when you get the card, get your friend to cancel the joint card. I’d recommend holding out for a credit card that has no annual fee, the interest rate doesn’t matter (since you’re going to pay it off every month, right?). Rapidly they’ll increase the limit if you just use it and pay it off consistently.

You now have started a credit history in that country, your friend isn’t liable for you any more, and you’ll keep getting more offers as you use and establish your credit in your own name. I always pay my credit cards in full (along with all other bills) and got a Visa, Mastercard and AMEX early in life and have never gotten more cards (except for a gold AMEX I only use for renting cars, because it covers the insurance). When it came time to get my first mortgage, the rep I was dealing with expressed amazement at how high my credit rating was. I expect if I ever apply for a mortgage in the US, my credit should also be fairly decent.

Investment Recommendations For Friends

Everyone always loves to say “do your own research before purchase”, “make sure to do your own due diligence” or “this is just for informational purposes, not to recommendation to buy or sell” and garbage like that. People are clearly reading investing opinion pieces because they can’t reach their own conclusions, and are prepared to defer to someone they feel is more knowledgeable. The disclaimer is just a cop-out to avoid blame if things hit the fan.

With that in mind, I’ve been happy to write about pretty much anything on this blog, and am equally open with thoughts and ideas about investing to my real life friends and family.

After reading about Lending Club, my best friend and I went 50/50 on a $500 investment. We discussed all the available loans, would send back and forth loan options to fund, and after we’d loaned out the $500, all the loans were doing very well. We’d originally planned to re-invest the proceed, but instead we borrowed more from Lending Club to re-invest (leveraging my friend’s great credit rating since I didn’t have any American credit at the time). Another $2500 in and we were collecting loan proceeds to pay off our debt (and Mr. Cheap was feeling like a tycoon).

Then our first “post Christmas” crash hit, a bunch of our loans went into delinquency, and eventually bankruptcy. Our money has broke even (with the high interest loans JUST covering those who have been defaulting), and our hope is to break even or at least have a bit of our originally $500 left when we pay off the loan we took out.

More recently, in the middle of the sub-prime shakedown, Washington Mutual was yielding over 10%. I talked to my friend about how I love dividend stocks, how stable banks are, and how much they value investors’ long term confidence in their ability to pay dividends. Trusting my judgement, my friend bought in to WaMu at over $30. The stock prompt started nose diving. Partly because I wanted to share her pain, and partly because I honestly thought it was unwarranted pessimism, I bought it myself at $21, buying on margin (which wasn’t terribly smart since I’m not working right now and will have a very low income when I’m back at school). Neither of us invested more than we could lose, but it really sucked when they started saying they’re going to cut their dividend by 2/3rds (I can forgive a low stock price, but if you cut your dividend you’re dead to Mr. Cheap).

Recently when I was talking to my friend I expressed my amazement that she’d still listen to me babble about money since the only thing I seem to be able to do is lose it for her. “Experience is a great teacher but she’s a costly one” rings in my mind, and more and more I see the wisdom of not providing specific financial advice to people you care about. Talking about the thoughts and philosophies are fine, but making specific recommendations just sucks if they don’t work out (and there’s always a risk they won’t).

Of course, do your own due diligence and acquire your own experiences before following any of my advice ;-). A wussy, garbage cop-out, but perhaps a wise one.