Moving to a new country is exciting. There are new relationships to build, places to explore, and much to do to establish yourself in a new land. Among all the challenges, there is one which is fundamental to your new life but its ramifications are not obvious. This fundamental pillar is your credit score.
What is your credit history?
Credit history is a record of the payments you make on loans. It could be loans taken on credit cards or for mortgages. It's a reflection of your financial health. The institution that issues you a credit card or a loan effectively takes a chance in giving you the funds to affect a purchase. In return you make a commitment to pay back the institution in full or in part, on a schedule. Over time your credit history builds up - with a record of your loans and payment behavior. Some companies, like Transunion and Equifax in North America, consolidate your credit history into a score that reflects your rating. This information can be made available to financial institutions or individuals permitted by you.
Why is a good credit history important?
Despite having good financial health in your native country, the banks in your new country do not have access to your credit profile.
Your credit scores would typically be used when applying for the following:
- Mortgages ,
- Credit cards,
- Auto loans,
- Some jobs,
- Cell phones,
- Renting an apartment,
- Loan refinancing,
- Setting up accounts with utilities (electricity, gas).
The individual or entity assessing your application would request access to your credit score. A low credit score on the application may result in a denial. Alternately you may be offered terms that are restrictive (pre-payment) or at high interest rates.
The difference in interest rates for two individuals with credit scores 660 vs 600 is over 1%. The person with the lower score pays about $1000/year more for a $100K loan. Over a 30 year term this a substantial $30K difference. [Data via myFico].
Tips for building a good credit score and history
A strong credit profile reflects the risk of you defaulting on loans. So it's important to show you are financially competent. Here are a few tips.
- Get a credit card. There may be a disinclination to getting credit cards. We don't recommend you get every card out there but it makes sense to get at least a credit card. It's one thing to have zero credit utilization but the credit bureau needs to see you can be trusted with credit.
- Make on-time payments. Most financial institutions have the facility to set up automatic payments for credit cards. Even if you prefer to pay off all credit card loans in full, it may make sense to set up auto payments for the minimum amount.
- Have low credit utilization.
- Sign up for Dwello's rent payment service. Rent is typically the largest monthly expense for most of us. Dwello is a service that ensures your on-time, regular payment gets recorded with the credit bureau. it's the easiest way to build credit history without stretching your wallet.