Credit History: Journey of a thousand mile for an International Student in USA
Original Article published on theashani.com
The financial topic which is most talked among the international students(I know, first is the student loan part!) is credit history. The day you enter United States you start hearing about credit history from your relatives, friends, colleagues, everybody!
I am not a financial expert but being an international student in US has taught me various things which I believe is known to every person coming to States. Hence, in this article I have compiled not just the basic definitions you need to know but also, various beginners credit card suggestions and a few Do’s and Don’ts.
What is Credit History?
Honestly, it’s just a way of telling others how good you are with your finances. It’s like borrowing money from your card and paying it back on time.
Why is Credit History necessary?
It helps you to prove your credibility in US. You pay your credit card bills on time and when you actually need a loan, banks can verify your credibility by checking your credit history. It gives us, the international students, a fairly easy way to make sure that as and when needed, we are able to get financial help.
How to establish a credit history?
Get a Credit Card. Yes, that’s it! (Don’t panic after hearing phrases like you won’t get a credit card because you don’t have a credit history. We will make use of our student status to begin a good credit history by getting a Student Credit Card. I will discuss more about this later!)
How is Credit History measured and what are the parameters?
Credit history is measured using credit score which is affected by various parameters. The credit score is termed as FICO (FInancial Accounting and COntrolling) and is determined by following major factors:
- Payment History: Make regular payments. I usually try to pay my credit card bill in full at the end of every month.
- Credit Utilization: So, you have an amazing credit limit of $10,000. It’s holiday season, let’s shop! NO! Always remember to keep the utilization to 30% of the card’s limit i.e. if you are with the credit limit of $10,000 (which never happens if this is your first credit card!), keep the expenditure to $3000 or less. I personally prefer to keep it somewhere around 8%–10% and try to split my expenditure between different cards. (I know you have just one card yet! Don’t worry, keep the utilization below 30% and soon you’ll land yourself a better credit line and a bunch of cards.)
- Length of Credit History: Use your first card consistently over a period of time. Keep applying at regular pace(maximum of 3-5 credit card applications a year) and be a consistent and responsible user of credit. Longer good credit history means better credibility!
- Credit Mix: Yeah! Your story will not end with a few credit cards. You’ll have to make sure that you not just have different types of credit cards but also something like personal loan or home loan. But, let’s not worry about these now!
- New Credit: Don’t apply for several credit cards one after the other. Too many inquiries shows you’re desperate for credit.
What is a Credit Card and how is it different from a Debit Card or Charge Card?
Visually, it’s just a card like other debit cards you’ve seen but behind, there’s a lot more to it. Unlike debit cards, which are associated with your bank account, this one is not! Also, the money you spend using your credit card need not to be paid in full at the end of every month unlike the charge cards. Understand it more with reference to your loan application:
You go to a bank and ask for loan — You apply for a credit card with a bank.
The loan amount sanctioned to you varies as per your eligibility — Your credit limit on your card varies too!
You get the money and start repaying it in installments , here banks assume you have used the money you asked for— You get the card and if you spend money using it, at the end of every month, you try to repay it in full or at least the minimum amount, just like installments. You repeat this process throughout the lifetime of your credit card, which ends when you decide to close the account.
What are the various types of Credit Cards?
There are 2 major categories of Credit Cards which you should be aware of before getting your first credit card:
— Secured Credit Card: This is the easiest way of starting a credit history by getting a credit card from the bank where you have your deposit account. You’ll be asked to deposit certain amount of money, usually 100%-200% of the credit limit. This gives the bank some sort of assurance that you’ll repay the amount.
— Unsecured Credit Card: This is like any other credit card but without any deposit. The chances of getting approved for these are less but students can get student credit cards easily. I prefer unsecured credit cards over the secured ones as it gives me more financial flexibility.
What are some of the Beginners Credit Cards?
You are now left into the vast ocean of credit cards to select the one suitable for you. Since this is your first card, the options are limited. You can choose from the list below to get yourself started:
- Discover it for Students
- Citi ThankYou Prefered Card for College Students
- The AMEX Everyday Card
I will suggest you to go for Discover’s Credit Card and start building your credit history. After a period of 3 months, apply for AMEX Everyday Card and then stop! Use these two wisely and have a good credit history in the first year. By the end of first year, you’ll be perfectly accustomed to the credit system and can apply for other cards using the good credit history you’ve maintained over time.
How to keep track of your Credit Score?
Use creditkarma.com simple! I use it and I can easily track my score and also get good recommendations for future credit cards.
So, now go ahead and get a credit card and start building a good credit history. Until then, Happy Reading and remember to pay your bills on time!
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