Credit history and credit scores are invaluable in the U.S. If you want to buy a house, get a business loan, land a car loan or really receive any type of money from a lender, then you’ll need a credit history and score.
As an international student coming to the U.S., you may think credit scores don’t apply to you, especially if you plan on returning to your home country after graduation. The reality is if you’re getting international student loans, then it pays to have a credit history and credit score.
Even though you can get student loans before you come to the states without credit, a cosigner or collateral at some private lenders, these loans will hold a higher interest rate. If you want to refinance later at a lower interest rate(which trust me you do) then you’ll need a credit score and substantial credit history.
Today we are going to go over what effects your credit score, and how to build a substantial credit history to help you reduce your interest payments on your international student loans when you’re done with college. Or to simply set you up for your new life in the U.S. So follow along and get your notepad ready!
The 5 Factors That Affect Your Credit
Before we go over the five factors that affect your credit score we should make it clear that we are discussing the FICO credit score today. This is the most common type of credit score used in the states, however, there are other types like the Equifax credit score.
FICO actually stands for Fair Isaac Corporation which was the first company to create the general-purpose credit score to establish an individual’s credit risk. FICO scores range between 300 and 850. With 850 being the highest possible score signifying limited credit risk and 300 being the worst possible score signifying high credit risk.
There are five factors that determine your FICO score, they are as follows:
Payment history (35% of FICO Score)
Payment history is the most important part of your FICO credit score. It refers to payments you’ve made on credit cards and loans. Payment history takes into account the speed at which you pay back loans and credit cards as well as any fees or charges related to missed or late payments. Having a long, quality payment history is the best way to improve your credit score.
Amount Owed/Credit Utilization (30% of FICO Score)
This is the total amount of credit you currently owe divided by the total amount of credit you have available. Using more than 30% of your available credit is seen as a negative to creditors so it’s important to pay off your card regularly and avoid big purchases.
Credit history length (15% of FICO Score)
This is how long you’ve held your longest credit account, newest credit account and the average age of all your credit accounts. Usually, the longer you’ve held a credit card(as long as payments have been made on time) the better.
New credit(10% of FICO Score)
This is the number of new credit accounts you’ve recently opened and the number of hard inquiries lenders make when you apply for credit. Hard inquiries are made by car loan lenders and other private lenders to see your credit score. If you can avoid this type of credit inquiry you should because it hurts your credit score substantially.
Types of credit in use(10% of FICO Score)
The types of credit you have and the diversity of the mix account for 10% of your FICO score. Types of credit considered include car loans, credit cards, student loans, mortgages, and any other credit products. If a lender sees you have a diverse mix of credit and you consistently pay it off, your credit score will improve.
What To Consider When Starting Your Credit History Journey
Coming to the U.S as an international student can be hectic and fraught with a million new challenges from language barriers to international student loans.
Still, if you want to make a good life in the U.S. or if you just want to reduce the interest payments on your student loans when you refinance, then you’ll need to worry about a couple more things—your credit history and credit score.
There are many ways to establish a credit history in the U.S., but today we are going to discuss only the most important including bank accounts, credit cards, utility bills, store credit cards, and student loans.
The first thing you want to do in order to establish credit when you come to the states is to open a U.S checking and savings account. Any major U.S bank will accept cash and open an account for you even with little to no money down, however, there will be fees if you keep less than a certain amount in your accounts.
For example, Chase Bank charges $12/month for a checking account unless you have at least $1500 in the account or a direct deposit of over $500 a month. Similar fees apply to savings accounts. This means it might pay to save up a couple thousand dollars in order to open U.S bank accounts when you arrive in the states.
After establishing a U.S bank account the next thing you should do is establish your first line of credit in the U.S by getting a credit card. This is usually done at the same time you open your bank accounts and doesn’t have any upfront costs.
However, in the U.S credit cards, especially for first-time borrowers, have especially high interest rates. So remember to pay off your card at the end of each month, or you’ll be paying some pretty high interest-fees going forward.
Next, you need to link your bank account up to your utility bills in your apartment or house to build your credit history. If you’re in a dorm room this won’t be possible, but for any students living off-campus, this should be a priority because it’s excellent for establishing a credit history and state residency as well.
Store credit cards
Having a store credit card from a U.S. retail store like Nordstroms is another great way to improve your credit history by diversifying your credit mix. Store credit cards usually have no requirements upfront and low fees so any international student should be able to qualify.
Just make sure you reliably pay off your balance and you don’t utilize too much of your credit on any one month, as we’ve discussed keeping your credit utilization below 30% improves your credit score over time.
Student loans will also help you improve your credit mix. As long as you pay off your loans on time, student loans show the bank you are a responsible lender. However, international students often have too much of their credit mix in student loans which hurts their credit score, that’s why getting other forms of credit to prove to lenders your reliability as a borrower is so vital.
If you are an international student, one of your first priorities when you come to the U.S should be to establish a credit history and improve your credit score. Of course, that can be easier said than done considering how confusing the U.S. credit system is these days. Still, if you take your time to break down the different aspects of credit and how they are used to determine your history and score, the whole system begins to make sense.
If it doesn’t, hopefully, this article will help clarify some of the finer points for you so you can get started on your journey to a quality credit history and score in no time.