The global economic crisis has demonstrated that credit is a necessary evil. As evidenced by the global housing meltdown, we now realize that citizens from Alaska to Zimbabwe are overextended. Yet, we still cannot seem to live without credit. As banks have halted lending substantially to businesses and individuals, the results have been personal and business bankruptcies, high unemployment, foreclosures, and the demise of some industries. Cash no longer makes the world go around. Credit does.
In the United States, people’s lives increasingly are becoming tied to their credit history. Without a U.S. Social Security number (which is used to identify your credit history) and a U.S. credit history, you are virtually invisible and will find it difficult to build and maintain a life in the United States.
Currently, in the United States, a credit check may be conducted on a person for many reasons including, but not limited to, applying for a new job (especially in certain industries), opening a bank account, having utilities turned on, renting or buying property or a car, buying a cell phone, purchasing insurance, and when applying for any type of credit.
Employers seeking to assist international assignees with financial services barely have a handle on how to offer their employees the basics of financial services (i.e., checking, savings, ATM/debit card), and often are at a loss when it comes to helping provide credit solutions for their international assignees.
In the United States, it generally is assumed by employers and their foreign national employees that they will experience little to no problem obtaining credit. This assumption usually is based on factors that may not be part of the criteria necessary to obtain credit in the United States, such as position with the company, income level, and existing finances in the home country.
For U.S. citizens headed overseas on international assignment, the same assumptions are made, including the assumption that a U.S. citizen may have a good U.S. credit history and already may have substantial credit in the United States, therefore making credit easily available to them in their new host country. Again, this is making the assumption that these are factors that are taken into consideration when granting credit in the host foreign country; however, other factors also may be part of the criteria for granting credit in the host foreign country, including race, gender, and living situation.
The Basics of Credit in the U.S.
Credit is defined as the confidence in a purchaser’s ability and intention to pay, displayed by entrusting the buyer with goods or services without immediate payment.
A consumer credit report is the collection of an individual’s consumer debt repayment records and contains the detailed history of borrowing, and payment and credit inquiries. This data is stored at a credit reporting agency (credit bureau).
In the United States, the three major credit bureaus are Experian, TransUnion, and Equifax. Based on analytics, which include equations, algorithms, and various formulas, a three-digit credit score (commonly known as a FICO score) is derived. Credit histories commonly are used but they are not the only criteria for securing credit. Factors such as employment, income, and debt-to-income ratio also are factors in a person’s credit score. Although there are different types of credit scores, they all have one objective in common—to act as a tool to predict future behavior.
Credit scores are employed by various types of companies such as credit card companies, mortgage lenders, and auto dealers with the key goal of determining how likely a person is to repay debt. Without a history of credit, a lender cannot assess repayment history and, therefore, the applicant is considered a major risk.
Local Factors Affecting Credit Scores
As most of the data is still dependent on local information from local credit agencies and the data includes local factors that include local traits and norms, this dilutes the concept of a global credit score. Local factors may take into account:
- Race—where laws do not prohibit it, as in the United States;
- Gender—especially in developing countries; specifically, women are thought to be a better credit risk then men because they often are responsible for taking care of the children and other family needs in the household;
- Living situation—globally, owners are considered a lower risk than tenants; however, in some countries, such as Canada, mortgage payments are not reported to credit bureaus;
- Choice to report data—in some countries, it is mandatory for lenders to provide all data to credit bureaus. In other countries, reporting information, negative or positive, is voluntary; and
- Repayment history—in a majority of countries, missing payments is considered a negative issue and indicates a higher risk profile; however, in some parts of the world, missing a few payments is considered an accepted norm.
As there is a not a generally accepted standard credit rating, a lender may find it challenging to interpret a foreign credit report, even if it were accessible.
A Global Perspective on Credit
Commonly asked questions include, “why isn’t there a ‘global credit score?’” and, “why don’t credit histories transfer from one country to another?” The simple answers are that international privacy data laws and the lack of a cohesive method to create a “global credit score” prevent this.
There currently is no system to transfer information between credit reporting agencies and lenders in different countries. In many countries, stringent consumer privacy data laws make it difficult and, in some countries, illegal for one country to share an individual’s credit history with a foreign lender. International assignees who move overseas may not be able to provide foreign lenders with access to their credit history in their host country even if they wanted to.
A significant amount of research has been conducted on the concept of a “global credit score” Although TransUnion, Experian, and FICO have offices in several countries, many countries still do not have a viable credit reporting system and, even if they do, each country has its own unique identifiers and own method for recording and reporting credit data (if it is even available, and in many countries it is not).
Foreign Nationals on U.S. Assignment
Foreign nationals without a U.S. credit history or a limited U.S. credit history most likely will fall into the category of what the industry calls a “thin file”—meaning their credit file does not have enough information to generate a credit score. Just because you have a credit report does not mean you have a credit score. To be scoreable, a credit report needs to meet certain qualifications that generally include a credit account that has been open for at least three months and at least one account that has been updated recently (usually within three to six months).
Following are some solutions to aid foreign nationals in establishing credit in the United States.
Secured credit. Once considered a scarlet letter or an option for the worse credit risks, secured credit is becoming a more acceptable method to establish credit. Many financial institutions offer secured products (i.e., credit cards or loans) that are secured with a deposit, usually held in a time deposit or savings account, and is for an amount equaling the credit limit. There is nothing to overtly identify the credit product as secured, and showing that the foreign national assignee can charge and repay debt each month will help build a positive credit history.
Gas or store credit card. As these card issuers have less risk exposure than larger issuers (Visa and MasterCard), these cards can be easier to obtain than a general-use credit cards. A disadvantage to these cards is that not all of these card issuers will report payments to credit bureaus, which defeats the goal of trying to build a U.S. credit history.
Piggybacking. A credit industry term that references the practice of using someone else’s established, presumable good credit as a way of building up your own credit. For example, if a father adds his son to his credit card as an authorized user, the credit card company will not check the son’s credit history and the son, as an authorized user, would not have an obligation for the debt, but the credit issuer will report the account on the son’s file. However, even if the foreign national assignee does have a close relative or friend who would be willing to do this for them, a lender still may be wary of extending credit to them.
Co-signing. As with piggybacking, if the foreign national assignee can find a close relative or friend who is willing to co-sign on a credit card or loan, this could be a viable option. In essence, the bank is relying on the co-signer’s credit. However, if the primary borrower (the foreign national assignee) defaults, it will show on the co-signer’s history and the lender will expect the co-signer to provide payment.
Alternative scores. Seeking out a lender that will accept alternative scores, which is a relatively new concept in the credit industry, is an option for foreign national assignees. The premise is that just because you do not have credit does not mean you are not creditworthy and that a person should not have to go into debt to qualify for credit. These scores use alternative payment data from specialized credit bureaus that keep track of things such as gym memberships, payments to utility companies, or rental payments to a landlord to generate a score. These alternative scores are gaining some traction and, if they continue to prove that they are predictive, lenders will be more likely to use them. A disadvantage is that alternative scores are not widely embraced by credit card companies mainly because the information is not reported to the three widely accepted credit bureaus. Also, depending on how long the foreign national international assignee has been in the United States, they may not have even have a substantial amount of alternative payment data to create an alternative score.
U.S. Citizens on an International Assignment
Just as foreign nationals on assignment in the United States have to build a U.S. credit history, U.S. citizens on assignment overseas also have to start from scratch if they want to obtain credit in their new host country. Without a standardized global credit score, there is not a method to interpret or confirm a U.S. credit history.
As the U.S. dollar is the predominant global currency, it is becoming increasingly common for consumers to be given the option of paying for goods and services in U.S. dollars versus the local currency when purchasing items abroad. Although these types of transactions might incur additional fees and costs, depending on length of assignment and current financial situation coupled with the possible difficulties involved in obtaining foreign credit, it is an easy, convenient alternative.
Another option is to ask the current U.S. lender to provide assistance in the new host country. Most of the big lenders offer various credit products in various countries and currencies. With existing credit from a U.S. lender, it might be easier to apply for a credit product from the same company in the new host country. Al-though they probably will not transfer your credit history, they already may have set parameters and products for existing customers moving overseas. Contacting the lender pre-departure to discuss alternatives offers the best chance for success.
Many foreign banks also have specialized divisions that cater to expatriates, including U.S. citizens. Obtaining a reference and or recommendation from the employer or existing U.S. lender if they have an existing relationship with a foreign bank also will help minimize challenges when applying for credit in a foreign country.
Depending on the specifics of the assignment, choosing not to obtain credit in a foreign country and instead using cash via an ATM or debit card might be a suitable solution. U.S. citizens lead the world as debtors, so taking on more credit, especially if it is a short-term assignment, or if the international assignee does want or need additional credit, may create unwanted problems.
Globally, ATM and debit cards are becoming more readily accepted; however, international assignees have to remember that ATM and debit cards usually have daily transaction limits, and with exchange rate volatility, purchasing power could be affected. Also, using an ATM or debit card overseas may incur additional fees (overseas merchants tend to pass transaction fees to the consumer).
U.S. citizens also should think about the day they repatriate. They may need to use their existing U.S. credit history to rebuild and maintain their lives back home. Most U.S. citizens think that when they go on an international assignment, they should pay off all their debts and get rid of all their credit obligations. Closed credit lines, a lack of consistent credit activity, and also lack of a U.S. physical or mailing address all can have an effect on a U.S. credit file. Also, U.S. citizens planning on repatriating should make sure they keep abreast of new rules affecting U.S. consumer credit policies, especially policies that affect repayment terms. With changing regulations, lenders tend to react conservatively at first, which means they may tighten up their credit rules, which could make it challenging for U.S. citizens returning home after an assignment overseas.
Lisa R. Mitchell is vice president/manager, Wells Fargo International Personal Banking, San Francisco, California. She can be reached at +1 415 1328 or e-mail lisa.r.mitchell@wellsfargo.com.