I was in the US in December for two weeks to meet with my colleagues and to set up some things in advance before my relocation early January so that the first couple of weeks wouldn’t get too stressful.
One of the things I wanted to set up in advance was a bank account. It takes time for your debit and credit card to arrive and it also makes sense to start building a credit history as early as possible, as this is quite important in the US.
Not everyone can just open a bank account in the US. I still haven’t figured out what the actual rules are to get one. I tried once a while back without living in the US because a US credit card gives you access to all the good things like the US iTunes Store, Hulu, HBO, Showtime,… however that was not possible. Now that I am relocating I definitely qualify for one.
Let’s first discuss roughly how the US credit and banking system works and how it differs from the one in Germany, and as far as I know from all the systems at least in the EU.
Banks vs. Credit Unions
From Germany all I know are banks. In the US there are also credit unions though. A credit union is an organised group of people that share a common interest. There are credit unions for all kind of things. For example the Bay Area has several credit unions for people in the IT profession. There are also credit unions from employees of a large company.
The benefit of a credit union is that they don’t have the organisational overhead of a bank. From my understanding they usually don’t invest in the stock market or similar things. Their goal is to make the financial system work for people that share this common interest. This results in better interest rates in a lot of cases if you want to get a loan, e.g. to buy a car.
While credit unions usually seems to be a rather local thing, banks are much bigger companies that have a huge network of ATMs and operate at a much larger scale.
Both can have its benefits. I still haven’t figured out the details yet, though.
Debit Cards vs. Credit Cards
You may not know what a debit card is. While it does exist in Germany, this is a name I very rarely heard there. A debit card is simply a credit card but every time you use the card, the amount you pay is immediately taken from your regular bank account. In Germany most people I know call that ‘a credit card, but not a real one’.
In Germany we also have a Girocard, which is a card that is issued directly by your bank and that behaves like a debit card. I never figured out what the difference between a Girocard and a debit card is other than that a debit card is issued by the credit card companies, such as Mastercard and Visa.
In the US, the card you get with your bank account is a debit card. There is no third option. My understanding is that everybody has a debit card and you can also optionally get a credit card if you qualify for one based on income and credit score.
How Credit Cards work in the US
Credit cards in the US work very different from how they work in Germany. In Germany, if you have a credit card, you get a monthly statement from your credit card company or your bank and then they charge your bank account with the full amount of your card’s statement.
That is not the case in the US. You do get a monthly statement, but it is up to you whether you want to pay your credit card bill or not. If you don’t, interest rates will apply and these rates are very high. Similar to when you have a negative bank account statement.
The problem here is that this is especially tempting for people that already are struggling financially. If you are having financial troubles it is very tempting to just skip a couple of credit card bills and ‘take care of that later’ and quickly these bills pile up. Banks even advertise with getting a credit card to pay the depth of your other credit card. This of course solves nothing and you only end up with two credit cards that you can now use to pay for things you can’t afford.
Be aware of this and be very careful to not fall into this trap. It sounds very tempting and the offers from the banks sound very great, but if it sounds to good to be true, there most likely is a catch to it.
Also not paying your credit card regularly will lead to a bad credit score, which is something you want to avoid at all costs.
Your Credit Score
Your personal credit score is super important in the US and everyone makes a big deal out of it. It is a rating system that qualifies how good you can handle money. At least that is the idea. If you have a good credit score you get better interest rates for loans. But it is also widely used in other areas: it is easier to get an apartment, insurance companies use it, mobile carrier use it and so on. The credit score is everywhere, so you better make sure you have a good one.
If you move to the US the biggest problem you have in that regard is that you don’t have a credit score, which is equally bad as having a bad score or sometimes even worse. I found car insurance companies where not having a credit score is simply not an option. You can enter your credit score but there is no way to say you don’t have one, it is simply not possible to sign up for their insurance if you do not have a credit score — at least not online.
So your first financial goal when arriving in the US is to build a credit score. In order to do that you need to understand a bit about how the system works.
Working on your Credit Score
You may think that, in order to get a good credit score — to proof that you can take care of your money — you should save up money and make sure to only spend the money you actually have. That, however, is not how the system works. If you do that, the credit score system does not know you even exist. You do not show up in any credit system because you have no credit, loan, lease or anything similar.
In order to get a good credit score, you essentially need to spend other peoples’ money and prove that you pay it back. The irony of that is, that you do not get other peoples’ money unless you have a good credit score — or in other words: if you want a good deal on a loan, you first need to get a bad one.
If you want to spend other peoples’ money — in this case your bank’s money — getting a credit card seems to be a good point to start and is relatively easy if you have a regular income. But be aware: you also need to use your credit card regularly. Having a credit card and not using it is bad for your credit score. Also from what I’ve heard, you shouldn’t use the full limit of your credit card. That’s bad as well.
Essentially it seems like you want to prove that you are trustworthy enough to get a big credit card limit but you also want to prove that you don’t need it. To me that sounds schizophrenic but that is how the system works.
How to Build the Score
Personally I have decided that I’ll just keep living the way I am used to from Germany. That means I can follow my existing habits which makes it easier and limits the potential to screw up. Luckily this seems to also be a very good way to quickly build a good credit score. One could say that the German credit system is build in a way that tries to prevent people from ruining themselves financial, in contrast to the US one — but that is just my five cents.
I opened a bank account with Bank of America. Some people seem to hate them, others love them. The benefits they offer are great for what I need though, so I decided to go with them. They also offer Pay with all their card and they have ATMs with Pay, which I find very convenient. Your mileage may vary though, so you should definitely compare different banks and credit unions yourself. Also check with your new employer, there may be corporate benefits you can use.
I also applied for a credit card. I find a credit card convenient and it gets me started on my credit score. I then set up a monthly auto payment for my credit card. It is important to make sure that it is set up to pay the amount in full as there are other options available as well. That way my bank automatically collects the money I owe from my checking account in full each month and I don’t have to worry about that.
After a couple of month my plan is to apply for a second credit card because I think it is a great safety net if you are traveling and one of your cards stops working for whatever reason. Also there are many different ones in the US. The one I applied for has a couple of cash back options where you get money back if you use the card for grocery shopping and some other things.
Bank of America also offers one that has no fees if used abroad. As I will be traveling to Germany a lot, this is very useful for me. As I will never use both at the same time under normal circumstances — I am either in the US and use the cash back one, or I am in Germany and use the travel related one — I can’t easily run into the issue of using both cards excessively, spending more than I should.
This, so I hope, should get me a decent credit score quickly.