Understanding the US Credit System: A Comprehensive Guide for International Students

Photo by micheile henderson on Unsplash

In the U.S., the credit system allows people to borrow money, spend it, and repay it later, most often with interest. Whether or not a person can borrow money, and how much money they can borrow, depends on their “creditworthiness”: how likely are they to pay the borrowed money back? In full? On time? The way that this is measured is called the credit score.

Your credit score is like a financial passport. It is very important because it influences your ability to do everything from renting a flat to buying a car. Understanding how to build and maintain a good credit score is essential for making the most out of your stay in the U.S.

What is a Credit Score?

Simply put, your credit score is the measurement of how creditworthy you are. There are a few credit bureaus, the 3 main ones being Equifax, Experian, and TransUnion, that collect all of your financial information and create your credit reports. Based on these credit reports, there are companies called credit scoring companies, the main ones being FICO and VantageScore, who assign you a 3-digit “score” that represents your creditworthiness, ranging from 300 to 850.

Here are the ranges:

• Poor: 300–579
• Fair: 580–669
• Good: 670–739
• Very Good: 740–799
• Excellent: 800–850

How Is The Credit Score Calculated?

• Payment History (35%): This is the most significant component of your credit score. It reflects whether you make payments on time. Missing a payment can significantly affect your score, while consistent timely payments can enhance it. This includes all credit payments, such as credit cards, car loans, and mortgages.
• Credit Utilization Ratio (30%): This measures how much of your total available credit you are currently using. For example, if you have a credit card with a $1,000 limit and you’ve used $300, your utilization ratio is 30%. It’s recommended to keep this ratio below 30% as high utilization can indicate to lenders that you’re over-reliant on credit, which can lower your score.
• Length of Credit History (15%): Lenders like to see a long history of responsible credit usage. This includes the age of your oldest credit account, the age of your newest credit account, and the average age of all your accounts. Younger credit histories tend to lower your score, so it’s advantageous to start building credit early and not close old accounts.
• Credit Mix (10%): This factor looks at the diversity of your credit accounts. A healthy mix might include credit cards, a student loan, a car loan, or a mortgage. This variety shows lenders that you can handle different types of credit responsibly. No, this doesn’t mean you should go and issue a loan to bump up your credit score — your credit mix will improve with time, patience is key.
• New Credit Inquiries (10%): Every time you apply for a new credit line, it triggers a hard inquiry into your credit report, which can slightly lower your score. Applying for several new credit lines in a short period can be seen as risky behavior because it might suggest financial instability.

How to Start Building Credit in the U.S.

Even without a Social Security Number (SSN), international students have options to start building credit:

• Secured Credit Cards: These cards require you to make a deposit, usually equal to your credit limit, which minimizes the risk to the lender and makes these cards easier to obtain. Over time, responsible use of a secured card can help you build your credit score and eventually qualify for standard credit cards.
• Retail Store Cards: These are credit cards that can only be used at specific stores (e.g. Target, Macys, Costco, etc.). They are often easier to obtain than regular credit cards, these can help build your credit if used wisely. Be cautious, though, as they typically come with higher interest rates and limited usability outside the specific store.
• Authorized Users: Being added as an authorized user on a relative or friend’s credit card can be a significant advantage. It allows you to benefit from their credit history without the responsibility for payments. However, ensure that the primary cardholder has good credit habits; otherwise, their negative behaviors could impact your score as well.

If you want to learn everything you need to know about building credit in the U.S., check out this detailed article.

Best Practices for Managing Your Credit

Effectively managing your credit is about more than just spending within your means. Here are some strategies to maintain a healthy credit score:

• Use Credit Wisely: Always aim to pay off your balance in full each month to avoid interest charges. If that’s not possible, keep your balances low and make more than the minimum payment if you can.
• Pay On Time: Even a single late payment can hurt your credit score, so set reminders and always pay your bills on time.
• Monitor Your Credit Reports: Regularly review your credit reports to catch any potential errors or fraudulent activities early. You can get free annual credit reports from each of the three major credit bureaus (TransUnion, Equifax, and Experian) at AnnualCreditReport.com.
• Deal with Errors Promptly: If you find errors on your credit report, dispute them with the credit bureau to have them corrected, which can improve your credit score.

Additional Resources

• AnnualCreditReport.com: For free yearly credit reports.
• Consumer Financial Protection Bureau (CFPB): Offers extensive information on credit and financial management.
• MyFICO: For more detailed information about credit scores and how to improve them.

Understanding and managing your credit in the U.S. will not only help you financially but will also ease your transition into life as an international student. It’s an important component of your financial identity in the U.S., so take it seriously and use credit responsibly to build a secure financial future. And as always, we’re here if you have any other questions or need any help!

Hey, I’m Krish! A fellow international student and the founder and CEO of roam. roam is an ecosystem that simplifies international student migration by putting together all the resources students need to start their lives in a new country in one place. We do this by publishing informative articles (like this one), creating personalized tools on our website, and building digital and in-person communities for international students.

If you have any questions regarding starting a life in the U.S. as a student, feel free to reach out! We’re here to help!