The Importance of Building Credit
If getting a credit card is not common in your home country, building a credit score may not be the first thing that comes to mind. The best time to start building credit is as soon as possible. Without a credit score, it’s hard to rent an apartment, buy a car, build wealth, prove to lenders you can repay your debts, or even find the best interest rates on your credit cards, loans, and other utilities.
What is the U.S. Credit Score?
It is a number ranging between 300–850 that’s calculated from a combination of factors: Payment history, the types of accounts you have, the amount you owe, and credit history.
Payment history refers to your track record of making payments on time. If someone has a history of late payments, they pose a higher risk to lenders compared to someone who makes them on time.
The accounts you have reflect how you manage different types of credit, such as a mortgage loan, credit card, retail store card, or student loans.
Lenders analyze your ability in making payments over time from both the amount of credit you owe and your credit usage. If you tend to use a higher percentage of your available credit, adding on top of any debt you have, you’ll be more likely to overextend and miss payments.
Credit history shows how long your accounts have been open and how long you’ve been actively using them. It also peeks into how often you close and open new accounts. While a new line of credit helps diversify the type of accounts you have, it also lowers the average age of your total accounts, which can cause your score to fluctuate.
Building your Financial Credibility
International students have a harder time building credit because:
- Any credit they have built from your home country may not follow you to the states, causing you to start from scratch;
- There are stricter rules for those 21 years and younger when it comes to being approved for credit;
- Many cards that are available to students will typically require a social security number (SSN). While you don’t need a SSN to have a credit history, it can make things easier.
However, there are still ways for international students to maneuver these challenges and prove your financial capabilities.
1. Open a bank account
Maintaining a local bank account helps demonstrate a financial history and establishes a relationship with that bank. If you have been a loyal and trustworthy customer, the bank will be more likely to offer you some credit lines.
It’s also easier if you have an existing relationship with a bank from your home country that can also be accessed in the states.
Although the number of countries are currently limited, Nova Credit is a recent initiative you can look into, where they peer into your credit history from your home country and provide personalized recommendations and guides to help you get started.
2. Apply for a secure credit card
Unlike a normal unsecure credit card, a secure credit card requires you to make cash deposit, and your credit limit is the amount you deposited. It doesn’t require a SSN and can be a great way to start because:
- It can be used in stores the same way as a credit card.
- All payments and activity are reported to credit bureaus.
- There can be interest charges if the monthly balance isn’t paid off.
- It is using your own money as credit, ensuring you won’t go over the limit.
For more options, Deserve is a company built by former international students, where you can apply for a credit card without a SSN. Jasper is also a considerable option, where they don’t require either a credit history or SSN, as long as you provide passport or visa information and proof of income.
3. Get an unsecured credit card
It’s likely that you will receive a lot of advertisements for opening a credit card as soon as you arrive to the states. However, it’s unlikely you would be qualified for them without existing credit history. In fact, you should be cautious about credit offers that do not require your credit history because they could be frauds, or you could end up paying unreasonably high fees.
Sometimes, you can get approved for a card with a co-signer to get a head start with their good credit. However, major credit card companies don’t always have this option or you might have trouble finding people who are willing and able to co-sign with you.
Some credit cards allow you to earn travel rewards or cash back with $0 annual fee. Check out some of the best student credit cards here. However, don’t be tempted to apply for too many cards at once.
4. Make all your payments on time
Missing payment deadlines have a huge negative impact on your credit score and can take weeks to recover. Setting up automatic payments is one way to ensure you won’t miss any of them. If you have trouble paying your bills, it’s best to keep in touch with your creditors as soon as possible.
While companies require you to pay the minimum balance, those that transfer over can earn interest and make it harder to pay off over time. Paying the credit card balance in full can help avoid costly interest payments later. It can be best practice to use 30% of your available credit to help ensure you have the financial capacity to pay it back each month.
There are instances where some of the utilities you pay each month, such as rent, aren’t being reported to credit bureaus. If you haven’t been given a score yet, or need to provide more information, ask if these utilities can be reflected in the report as an additional boost.
Overall, you don’t have to be afraid of using credit cards. When used efficiently, credit cards can give you an advantage in understanding your personal cash flows and help establish your financial history. For additional resources, check out the following links: