Banking system in the USA can be quite different and difficult to understand for international students in the USA. As I mentioned in the previous blog of this series, banking is a large topic. Therefore, it was split into four blogs. The first one was focused on the different types of accounts and the necessary basics to understand the system. While this blog, the second one, will be focused on the credit system (cards and score), the third one will focus on more advanced topics and advice on how to use and maintain your credit and the final one will be about tips and tricks to make the most out of your cards, accounts and money.
Before we jump right into the topic of this blog, I want to clarify some important notes:
- I’m not a financial expert or affiliated to any bank or credit union. All of this info was obtained through experience (as an international myself, currently a 4th year) and thorough investigation.
- All this info has been updated to October 2024; information can change any time so please confirm that all facts are still applicable at the time you read this blog.
- Finally, all economic decisions, investments, etc. are your responsibility, so please don’t follow my opinion (specially during the tips section) blindly and without confirming any variable that might apply to your specific case (nationality, tax information, visa status, etc.).
With that disclaimer, let’s get down to business. In the United States, credit scores and credit cards are crucial tools for managing personal finance. They affect your ability to secure loans, rent an apartment, and even influence job applications. For international students, establishing a U.S. credit history and obtaining a credit card can be a challenge but is essential for future financial success. Before stating the basics about credit, it is necessary to address the importance of the Social Security Number (SSN) and the Individual Taxpayer Identification Number (ITIN), since both the SSN and the ITIN play important roles in credit reporting, credit card applications, and financial transactions. Without them it will be almost impossible to obtain any credit.
The SSN is a nine-digit number issued by the U.S. Social Security Administration (SSA) primarily for tracking individuals' earnings and for Social Security benefits. However, the SSN is also used extensively in financial and credit systems. While an ITIN is a tax processing number issued by the Internal Revenue Service (IRS) to individuals who are not eligible for an SSN but need to file U.S. tax returns or be listed as a dependent on a U.S. tax return. ITINs are used primarily for tax purposes but can also be used in some cases for credit-related activities.
How does the SSN and ITIN relate to credit?
- Credit History Tracking: When you apply for credit (e.g., a credit card, loan, or mortgage), lenders use your SSN to track your credit history through credit bureaus like Equifax, Experian, and TransUnion. This history includes details about your borrowing and repayment habits, including your credit accounts, payment history, and credit inquiries.
- Credit Report Access: Lenders and financial institutions use your SSN to pull your credit report from credit bureaus. This report helps them assess your creditworthiness and make decisions about whether to extend credit, what interest rate to offer, or whether to approve a loan.
- Loan and Credit Card Applications: Most U.S.-based credit card companies, banks, and other lenders require an SSN as part of the application process. This allows them to assess your credit score and your overall financial profile.
- Identity Verification: The SSN is also used to verify your identity when applying for credit, opening bank accounts, or making large financial transactions. This helps prevent fraud and ensures that credit is issued to the correct person.
- Credit Applications Without an SSN: While an SSN is the most common identifier for credit reporting and applications, some financial institutions accept an ITIN as an alternative for individuals who don’t have an SSN (such as international students or non-resident aliens). For example, certain banks and credit unions may allow you to apply for a secured credit card, student credit card, or even a loan using your ITIN.
Now that we have a basis on the main requirement for having a credit in the US, we are ready to talk about the basics. A credit score is a three-digit number representing your creditworthiness—essentially, how likely you are to repay borrowed money on time. Credit scores in the U.S. are calculated using models, like FICO or VantageScore, which generally range from 300 to 850, with higher scores indicating better credit. FICO credit score is graded according to the following score ranges:
- Excellent: 750-850
- Good: 700-749
- Fair: 650-699
- Poor: 600-649
- Very Poor: Below 600
For international students, building a credit history from scratch is important since you likely won’t have a U.S. credit score upon arrival. Without a credit score, it can be difficult to qualify for loans, rent apartments, or obtain certain financial products. The credit score starts being calculated once you obtain your SSN. However, your first score won’t appear until six months after obtaining the SSN. It is important to understand how the score is calculated so that we can start taking care of those factors to have a good score and maintain it in the future.
Credit scores are determined by five key factors:
- Payment History (35%): The most important factor—lenders want to see that you have paid previous credit obligations on time.
- Amounts Owed (30%): This refers to your credit utilization ratio, the percentage of your available credit that you're using. Keeping this ratio low (below 30%) positively impacts your score.
- Length of Credit History (15%): The longer your credit history, the better. This includes the age of your oldest account and the average age of all accounts.
- Credit Mix (10%): A diverse mix of credit (credit cards, car loans, student loans) can positively impact your score.
- New Credit (10%): Opening too many new accounts in a short period can lower your score, as it suggests financial instability.
As you can see, the number of accounts as well as for how long they have been opened for plays a role on the credit score. Therefore, at the beginning, most international students will have a lower score in these areas since we are starting from scratch. In part 3 of this blog series, we will discuss which and when to open different accounts and how to manage them to maintain a good credit score.
Moving forward, let's talk about credit cards. Credit cards are the most common way to establish and build credit in the U.S. They allow cardholders to borrow money for purchases up to a set credit limit and repay it later, either in full or over time, with or without interest (more on this in part 3). There are different types of credit cards:
- Secured Credit Cards: These require a cash deposit as collateral, which typically serves as the credit limit. They are ideal for those with no credit or poor credit and are a great starting point for international students.
- Unsecured Credit Cards: These do not require collateral. The credit limit is based on the issuer’s evaluation of your creditworthiness. These are more difficult to obtain without a credit history but may become an option after establishing some credit.
- Student Credit Cards: Designed for college students, these cards often have lower credit limits andand they are good for building credit history.
- Rewards Credit Cards: These offer points, cash back, or travel rewards for every dollar spent. However, these often require good or excellent credit and may not be suitable for those starting out.
- Store/Airline Credit Cards: Issued by specific retailers, such as Amazon, United airlines, HEB, etc., these cards often come with high interest rates and limited usability (only at the issuing store), but they may be easier to qualify for and can help build credit.
Besides the different types of cards, there are also some important concepts to understand when selecting a credit card:
- Annual Percentage Rate (APR): This is the interest rate applied to any outstanding balance on the card. Paying your balance in full each month avoids interest charges.
- Credit Limit: The maximum amount you can borrow using the card. Keeping your balance below 30% of your credit limit is advisable for maintaining a good credit score.
- Minimum Payment: The smallest amount you are required to pay each month. Paying only the minimum incurs interest on the remaining balance.
- Grace Period: The time between the end of your billing cycle and the due date for your payment. Paying the full balance within this period typically avoids interest charges.
I understand so much info and concepts can be overwhelming, so I'll try to summarize how credit cards work and the important factors to have in consideration when selecting a card. Credit cards are the main way to generate a credit history (which will be reflected in your credit score) and they allow you to make purchases up to a certain limit and pay it back later, either in full or over time, usually with interest if not paid in full. Therefore, when opening a new account is important to consider the bank fees (annual fees, late payment fees, and foreign transaction fees), APR for how much interest you will be charged and the rewards and perks that comes with the card. Once more, there will be more details and a more practical explanation about which cards to get and how to use them in the next blog.
I hope this blog has given you some insight and some guidelines about the basics and requirements for international students in terms of credit in the US. As I mentioned at the beginning of this blog, this will be a series of blogs where we will go deeper and discuss more advanced topics in the next parts of these series.
About the author:
Manuel Carmona Pichardo is from Pachuca Hidalgo, Mexico and is a current Ph.D. student in Chemistry. He got his B.S. in Chemistry at Universidad Autónoma del Estado de Hidalgo in 2016 and his MSc in Chemistry from Cologne University in Cologne Germany. Read more.
Further Reading:
Banking in the USA for international students Part 1: the basics
Banking in the USA for international students Part 3: Dos and don’ts with accounts
Banking in the USA for international students Part 4: How to play the game