Understanding the US financial system as an immigrant
Demystifying the financial journey for newcomers to the U.S.
Relocating to a new country comes with its own unique set of problems. The problems come with a mix of culture shock, economic challenges, and adjusting to the requirements of the country's financial system. For immigrants in the USA, a big part of adjusting to the system will require understanding how credit scores work and how your score may affect your purchasing power in the long run.
Research by Brookings showed that the immigrant population in the U.S. grew by an unprecedented 57% between 1990 and 2000. In the years after, the numbers have steadily risen and Inside HigherEd identified in 2018 that 28% of all the college students in American institutions are from immigrant families.
In America, your credit score determines the amount of money that you can lend from a financial institution and the interest rate you will pay to do so. Concurrently, a higher score means less friction and lower rates during the lending process, and the reverse means you're likely to meet more hurdles and pay more. If you are considering making a large purchase, such as a house or a car, your credit score can make a large difference in your monthly payments.
Getting into the system
A credit score grants individuals access to a variety of financial tools and safety nets from the U.S. financial system. Through having a decent credit score one could access funds for mortgages, car loans, student loans, and various other financial services. Without a score, you may find yourself paying more for these essentials.
For immigrants with no credit history in the US, which is an important prerequisite for accessing a credit card, it is still possible to gain access to this facility.
One of the easiest ways for immigrants to build their credit scores is through an act of trust-building with secured credit cards. This approach comes in handy for international students in the US and generally those who have cash on hand since it basically involves using a certain amount as collateral and then being able to borrow up to that amount.
Through a secured credit card, an immigrant could then add substance to their credit history within the system and invariably increase their credit score.
This trust-building approach through a secured credit card favors both the bank and the immigrant because it minimizes the risk of lending for both parties. However, it restrains the use of one’s hard-earned money and the limits can often be quite low - $500 to $1,000 - making their usefulness less than expected.
Unsecured Cards
Unlike secured cards that basically function as collateralized loans, unsecured cards are given to individuals without the need for granting the bank indefinite access to an asset. Iin the event of a customer default, the bank offering unsecured credit may still employ the court or garnishment to get back unpaid debt. Late payment may also be reported to credit reporting agencies, harming one’s credit score.
Accessing an unsecured credit card is solely based on the various components that form one’s credit score. Through the credit score, the banks then determine the customer’s spending limit on their credit card. The question then becomes how does one calculate their credit score.
Understanding the Credit Score
Your credit score is a rating between 300-850 that depicts a customer’s creditworthiness. The higher the score, the higher your creditworthiness and vice versa for lower scores.
The credit score is calculated by evaluating five main factors. The factors are the customer’s payment history, the total amount owed, length of credit history, types of credit, and new credit.
The payment history that accounts for 35% of the score focuses on if the customer pays the debt on time. The total amount owed (30%) considers the amount of credit available to be used, so lower debt means a better score. So, focusing on improving these two factors by paying balances on time and using a lower percentage of your overall available credit will have the biggest impacts upon your credit history.
The length of credit history (15%) factors in how long a customer has been taking credit. So, longer average history translates to less risk and a higher score.
The type of credit and new credit both account for 10% of the score respectively. The type of credit factors in the reasons for the previous loans to evaluate your creditworthiness and the latter factors in recent accounts that were opened by the customer.
Getting the best credit score
Considering the number of factors that affect immigrants' credit scores and not to mention bureaucratic hurdles that they face, it is very important that they get the best possible access to credit cards.
Even for native-born students in the US, a variety of challenges that includes age restrictions combined with an absence or lack of income stream could hinder one's access to credit. As an immigrant, the challenges are compounded by a lack of understanding of the system and other factors.
However, an F-1 visa that's usually given to immigrant students in the U.S. gives the beneficiary an option to work and invariably build their credit score. So, it is possible to put yourself on the path to creditworthiness even if you are not on the immediate path to a green card.
You may or may not be required to present a social security number before access to the lending facility but everyone with an F-1 or M-1 visa is authorized to work in some capacity, so getting a social security number is also possible.
Make your choice: Secured Credit Cards vs. Unsecured Cards
As mentioned earlier, building a credit score for an immigrant will require having a credit history that can be built with a secured card. There are a number of services that provide this facility and they also offer various perks to the customer.
Some of the perks include giving you the ability to spend more than you have and then pay for the debit later. Among the list of secured cards available, Discover It MasterCard, Capital One MasterCard, and the US Bank Secured Credit Card are the preferable choices.
If you wish to build your credit score and earn rewards while at it, then Discover It Secured card is one way to go. This service offers 2% cashback on normal transactions, and you won't also have to worry about the dreaded annual fee.
Capital One Secured cards offer a faster route to accessing credit upgrades in a relatively short amount of time, as long as you don't default on any payment during the period.
However, for an immigrant that harbors the intention of staying in the country or maybe move to an unsecured card, then the US Bank Secured Credit Card is advisable. This card comes with the baggage of a $29 annual fee but also offers the promise of a more flexible financial experience in the US with an unsecured card.
For Unsecured cards, there are also a number of options available to pick from. Petal credit offers a credit card service that grants users that have good credit score cash back rewards for using the card. Other unsecured cards include Surge MasterCard designed for people with low credit score and Indigo if you have good credit.
In Summary
In the U.S. where your credit score can dictate your quality of life, it is important to get to a grip of how credit works and how you can build a better credit score as fast as possible. For an immigrant with no information about the system, this can be daunting but with diligence and some inquiries, it is possible to build a great credit score that could save you thousands of dollars in the long run.
