It is imperative for every international student in the United States to be aware of their credit score, how it works and why it is so important for their financial life in the short & long term.
Below, we share everything you need to understand U.S. credit scores and how you can build and improve your score as an international student in USA.
How to build your credit score in the U.S. as an international student
by Ipshita Agarwal | Nova Credit
Moving to a new country is challenging – personally, professionally, and even financially. Even if you had a stellar credit record in India, you still have to start building your financial life from scratch in the U.S.
On top of that, credit scores in the U.S. are a completely different ballgame – you need a good credit score for basic things like getting a mobile phone plan, renting a house, getting insurance, buying a car, and sometimes even applying for a job!
As an international student without a U.S. credit score, you may have to end up having to pay very high security deposits for things like renting a home or getting a credit card.
For instance, you may have to put down a $2,500 security deposit with your landlord to rent a place or a $500 deposit with your bank to get a credit card.
Worse still, your application may even get rejected by some service providers like insurance or loan providers.
So, how do you start building your credit score?
Typically, you need to have a credit product like a loan or a credit card, to start building your credit score.
But, to get a loan or a credit card, financial companies first need you to have a credit score. A classic ‘chicken-or-the-egg’ problem!
Thankfully, there are still ways you can start building your credit score from day one in the U.S. – more on that in a bit.
But, before that, let’s back up and address a few important questions.
What is a credit score?
A credit score is a number representing the credit worthiness of an individual.
It is calculated by organizations known as credit bureaus. Credit bureaus analyze your credit and repayment history to calculate your credit score.
This score is then used by financial institutions, potential lenders and others to determine whether you can get credit and the terms at which you get it, by looking at the probability that you will make your payments on time.
The primary credit score used in the U.S. is a FICO score, used by over 90% of U.S. lenders.
How is the credit score calculated?
Typically, the credit score is calculated on the basis of your credit history, which has several components such as – number of credit accounts, oldest account, late payments, and the number of recent inquiries for your credit score.
What is the lowest and highest credit score?
The lowest FICO score possible is 300 and the highest is 850.
FICO defines ‘good’ credit as between 670-739, ‘very good’ as 740-799, and ‘exceptional’ as 800-850.
What are the top factors affecting the credit score?
Generally, five factors are considered in calculating your FICO score. These factors also have different weightages in the score.
- Payment history (35%) – Most important factor in the FICO score, accounting for 35%. This represents whether you’ve made repayments for past and current credit products on time
- Amounts owed (30%) – At a close second, accounting for 30%. This represents whether you are using a high percentage of the credit limit available to you across your credit products. If let’s say your credit limit on your credit card is $1,000/ month and you use $900 every month, it implies that you are overextended and contributes negatively towards your score
- Length of credit history (15%) – This represents how long you have had credit products, and in general, a longer credit history improves your score
- Credit mix (10%) – This represents the mix of credit products you have – e.g. credit cards, loan instalments, mortgages etc. Usually, the better you manage different types of credit products, the better your score will be
- New credit (10%) – If you open several credit products in a short time-frame or even apply for several products rapidly, your score is usually negatively affected
Once you get a credit product and start responsibly managing it, your credit score usually improves with time. To begin with, six months of timely credit payments can usually help you get a reasonable FICO credit score.
Over time, you can upgrade and diversify your credit products.
As you make repayments on time, ensure you don’t use a high percentage of your credit limits, build a longer repayment history (for e.g. by keeping your old credit accounts active), diversify your credit products and ensure you don’t apply for too many credit products at once, your FICO score will likely improve.
How to check your credit score?
To check your score, you can use annualcreditreport.com to access your credit file from all three major U.S. credit bureaus (TransUnion, Equifax, Experian) for free once a year.
Several other fintech platforms also allow you to check your credit scores.
How to get a U.S. credit card and start building your credit score?
All in all, as an international student, the number one thing you should do to start your financial journey on the right foot, is to start building a credit score as soon as possible.
Typically, getting a credit card is the easiest way to start building a credit score.
Usually, large banks may not provide credit cards without having a credit score, but you do have a few options:
- Secured credit card – this is when you put down a security deposit with your bank and they issue you a credit card. These cards typically have low credit limits and limited rewards/ benefits
- Beginner unsecured credit card – you do not need to put down a deposit for these cards. However, these are usually unbranded/ less-branded cards with low credit limits and limited rewards
- Premium credit cards from global banks via Nova Credit – you can get a premium credit card like your American peers, with rewards and benefits that meet your needs from day one.
Nova Credit works with sophisticated credit card providers to help you use your home country credit history (e.g. your Indian CIBIL score) to apply for premium U.S. credit cards.
The credit card providers receive your home country credit report from Nova and are able to use that score to evaluate your U.S. credit card application.
Nova Credit also gives you personalized list of credit card recommendations based on your home country credit score, so you can apply for the right credit card with more confidence.
So, if you have a good credit score in your home country, you could get a premium credit card as your first U.S. card, through Nova Credit. No annual fee, no security deposit, and premium rewards. Nova was built for newcomers to the U.S., by people who themselves immigrated there for their MBA.
About the author: Ipshita Agarwal works at Nova Credit. She’s been an ed-tech entrepreneur, VC investor, and investment banker in the past. She completed her undergrad from SRCC in India and is an incoming Stanford GSB MBA candidate.
About Nova Credit: Nova is building a global financial system for the world. Nova helps immigrants to the U.S. access financial products without having a U.S. credit history, by helping them use their home country credit history to access these products, helping them start their U.S. financial life on an equal footing.