Navigating the financial system in the US
Moving to the US? Already in the US and confused about credit, debit, credit limit, credit score and cashback? Have you even heard of it yet? Worry no more, here's how it works.
Pick one or scroll down to read the whole post:
Checking and Savings Accounts
Credit vs. Debit Card
Credit limit
Credit score
Cashback
APY
Transfer money to or from your home country bank account
Venmo and Zelle
When to use credit cards
As any other time that I moved to a new country to work, when I arrived to Philadelphia I had to open a bank account.
Now, how to choose? Possibilities are nearly infinite! With Philadelphia hosting over 3,500 bank branches and the headquarters of more than 125 banks and 190 credit unions (source) the best bet is to ask your co-workers.
Easy, right?!
Lol
That's what you wished!
It turns out some banks do not service to non-US citizens. Feeling welcome already?
But do not worry, a quick search on Google can show you those banks accepting non-US citizens. Too lazy to Google? If so, you'll be eaten alive over here... But, lucky you, I'm feeling generous today. Check this non-exhaustive list of banks welcoming foreigners residing in the US:
- Bank of America
- Citibank
- HSBC
- Capital One
- Chase
- Wells Fargo
- PNC
- SoFi (online banking only, great for Savings account, not great for your first credit card if you have no credit score. Got it? I doubt so. But that's ok, keep reading.)
Check out the source.
Alright, let's assume you've chosen a bank. You go to one of its branches, meet one of their Customer Service Representatives (CSR) and you are finally ready to open your account. This is what you will hear about:
If you are not overwhelmed enough already, let me drop these additional bombs here:
- It is incredible expensive and difficult to do transactions to other banks. Especially if these banks are not American. Go here to learn more.
- To transfer money within the US you need either Venmo or Zelle, which you will link to your phone number, increasing the risk of becoming the target of scams. Go here to learn more.
- Some commerces add a surchage when you pay by card. Go here to learn more.
- You need a credit card to rent a car. Go here to learn more.
Let me guess... You are starting to regret your decision of coming to the US... But do not! The US is great! And the experience will be fun and totally worth it! But you need to learn what is out there (and, very importantly, your rights --we'll get to this in another post--) if you want to thrive in this "jungle".
Keep reading and learning, and you will be just fine!
Checking and Savings Accounts
There are two main types of accounts in the US: Checking and Savings.
Checking
In Europe, the equivalent to a Checking account is the regular bank account you open in a regular bank. This is the place where your money lives until you buy something and the amount of the purchase gets deducted from the total amount you have in your account.
This is the one you need for everyday life expenses and it's usually linked to either a credit or a debit card.
TIP: Some banks charge a monthly maintenance fee for having an account with them. However, it is often waived if you fulfill certain criteria like maintaining a minimum balance, making recurrent direct deposits (i.e. your salary), or completing a specific number of transactions.
ATTENTION: If you spend more than the amount in your checking account, you can be charged an overdraft fee. You can get an overdraft protection to avoid this. US banks have CRAZY fees when you take out more money than what you have and when you don't pay your debts on time. I even think the percentages of these fees (up to ~30%) are illegal in Europe...
Savings
Very often, in the US, when you open a Checkings account, you are offered to open a Savings account, too. Depending on the bank, you may even get the Savings account by default. This is where it starts to differ with the European system. In Europe, it is usually the client who requests to open a Savings account, while in the US, the Savings account is commonly offered by the bank.
Savings accounts usually offer better APY than Checking accounts. Plus, Savings accounts are better protected against frauds than Checking accounts. For these reasons, you want to build your emergency fund in a Savings account.
If you ever find yoursef withdrawing money from an ATM, always select "Checking account".
Credit vs. Debit Card
If you are as financially illiterate as I was when I first stepped into the US, you are probably wondering: Why on earth are Americans so obsessed in differentiating these two types of cards?
The reason is that Credit and Debit cards are wildly different in the US. Yet, both cards are linked to your bank account (Checking account in the US).
Debit Card
Let's start with the easy one.
You are probably familiar with this one, as it is the type of card we get by default in Europe.
Anything that you purchase with this card is directly deducted from your account balance.
This means that if your purchase price exceeds the amount of money you have in your account, you won't be able to purchase that product.
It totally makes sense, right? Why would you buy something when you don't have the money to pay for it? That's stupid! Right? Right... Anyone? Uh, oh.
Credit Card
It turns out Americans' perspective on how to manage their personal finances is substantially different from that we have in Europe.
With a credit card you can spend money you don't have!
When you use a Credit Card from an American bank, whatever you buy with it goes to a temporary "bag", and all expenses you have in X period of time accumulate in that "bag" instead of being directly deducted from your account balance. Thus, you are taking credit any time you use a credit card.
NOTE: You can have a credit card from a completely different bank than the one holding your checking account.
Because of this system, the cost of your purchases IS NOT immediately deducted from your account balance, and it allows you to spend more money than what you actually have in your account.
So what happens to the money you have accumulaccumulated in that "bag"? That "bag" is effectively debt you have with your bank and once a month you need to clear your debts and pay your card. In other words, you need to use the money in your account balance to reset your "bag" to zero.
Sweet!! Now you can finally buy that expensive 219 inch TV screen and have epic movie nights from the comfort of your home!!
Hey! Hold your horses, cowboy!
The ammount of money you can accumulate as "debt" in your credit card without negatively impacting your credit score is largely dependent on your credit limit. In addition, if you don't pay your monthly credit card bill (the "bag") and carry the balance to the following month you will pay exorbitant interest charges and your credit score will take a hit.
Got it?
If not, keep reading.
Credit limit
In short, the credit limit is the maximum amount of money you can accumulate in the "bag" of your credit card.
Yes, you are reading that right. Banks are setting "guard rails" on your money spending. As if you were a child.
Usually, when you open your bank account and get a credit card, your credit limit will be low.
In my case, CHASE gave me a credit limit of $800... Ridiculous!! So you just arrive to a new country, where you need to buy EVERYTHING to furnish your appartment, and the maximum you can pay at a time is $800?! What about paying the rent (>$1000)?! You cannot do it all at once with this credit limit! Enraging, right?
Well, there are ways to go around it. A bit stressfull if you don't know about these ways, though...
But let's start with how to increase your credit limit:
First, pay your credit card "bag" before you get billed. This means that you will be paying multiple times a month. But every time you pay, you reset your credit debt to zero and the count starts over. That's how you can spend over your assigned credit limit every month.
Second, beware that eventhough you have a spending cap of $X (in my case was $800), if you spend more than 30% of it, you will get penalized and your credit score will take a dip. In fact, anytime I use more than 10%, my credit score dips... Again, ridiculous...
Third, opening multiple credit cards will increase the amount of money you can spend without being penalized. This is because you can distribute your spendings. BUT, every time you apply for a new credit card (yes, you need to apply and they can decline) they will conduct a hard check on your credit score, which will take away points from it.
Fourth, because your credit limit is tight to your credit score, you want to increase your credit score by making all your payments on time. This is more of a long term strategy.
Now, what happens when your credit limit is so low that you cannot buy your essentials when you first move to the US? The response is that you're pretty much screwed. Okay, okay, that's a bit exaggerated. This is what you can do:
- Pay with the card of your home country.
- Get an American debit card. Here I strongly recommend SoFi. It's easy, it's fast, it's exclusively online, has a nice App, and transfers to and from Wise (maybe also other online banks) are free.
- If you get your first salary in a physical check (Isn't that prehistoric? lol), you can cash it out at almost any bank teller (avoid ATM for these large sums) and pay your spendings in cash.
Credit score
I've mentioned credit score quite a few times in this post, and you have probably deducted at this point that it is important to build and keep a good credit score. But what it is? And what is all this obsession around it? Why do you care?
What is the credit score?
Very simply put, the credit score is a number that informs about how good you are at managing your money.
In technical terms, the credit score is a numerical rating (ranging from 300 (very bad) to 850 (excellent)), calculated by credit bureaus or credit reporting agencies, that represents how trustworthy you are in the eyes of lenders --essentially, how likely you are to pay back borrowed money (e.g. the "bag" you generate when you use a credit card, or loans) on time--.
What is all this obsession around it?
High credit scores equate more advantages: From receiving credit cards that offer more perks, to qualifying for loan approvals (e.g. when you want to buy a house or a car) and decreasing interest rates.
Why do you care?
As a foreigner with the intention to go back to your home country within a year, you don't need to care about it.
If you plan to stay a couple of years, having a credit score can help in getting better credit cards (yes, there are different tiers of credit cards) with higher cashback or that provide some sort of insurance (e.g. car rental insurance) and decreasing interest rates.
If you see yourself staying in the US for a considerable time, definitely work on your credit score. It will help you get approved for loans to buy a house or a car, pay less for the rent deposit and some other more advanced perks.
If you want to improve your credit score, you need to know the factors influencing it and their percentage:
- Payment History (35%). How often you pay your loans or credit cards on time.
- Credit Utilization (30%). How much of your available credit limit you use. The lower, the better.
- Credit History (15%). Tracks the age of your oldest credit card. The older, the better.
- Credit Inquiries (10%): This is the number of hard checks. You want to keep it very low.
- Credit Mix (10%). Variety of credit types (credit cards, installment loans, mortgages). The more you have, the better. In my opinion this is because that's how the banks make money.
Cashback
Chashback programs are the epitome of consummerism. As such, they are a great reflection of the American society.
Cashbacks are rewards you get from spending money.
This is how it works:
- For every $1 you spend, you get 1 point (it can be more, depending on the tier of your credit car).
- If you consume in shops or restaurants with which your bank has partnered, you will get more points back. The catch? These are usually pretty expensive, or completely out of your consummer habits.
Then, there are several ways you can use these points:
- Travel. You can use these points to reserve a hotel, book a flight or rent a car with companies with which your bank has a partnership. Even if these options are usually more expensive than what you would usually go for, it's ""free"", right?? You didn't do anything to earn those points... dollars(?)....!
- Shop. You can use those points to buy things you don't need. Yeay! Your bank will present you offers from expensive shops or brands. But hey! They are offers, so they are cheaper, and, technically, is like getting stuff for ""free"", right?
- Cash it. This is usually the last option they present to you. Here, you can either 1) convert your points to USD and put them in your checking account, or 2) Cover a purchase so that purchase is cheaper. The catch? While 1 point equals $1.5 when you use it in the Travel and Shop categories, in this category, 1 point will be $1.
I will let you draw your own conclusions.
APY
APY stands for Annual Percent Yield and it is the effective annual rate of return taking into account the effect of compounding interest. In other words, it shows how much your money would grow in one year, including the interest earned on the accumulated interest.
This measure is commonly used to compare Savings accounts. So when choosing a Savings account, you want a high APY, as this will give you higher returns. For instance, knowing that SoFi offers an outstanding 4.5% APY and CHASE, a meager 0.5% APY, I would go for the SoFi Savings account.
Do not mix APY with APR, which stands for Annual Percentage Rate. APR reflects the cost of borrowing (or the return on saving, in certain contexts), including fees or certain other charges in the case of loans.
There are different types of APR. The one of your credit card is also referred as revolving rate. This is only relevant if you don't pay your credit in full, as the amount that you have not paid will carry interests and you will need to pay extra. APRs oscillate between 15 and 20%, higher than that is concerning.
You only care about APR if you borrow money.
Miscellaneous
In this section, let me address some topics that do not fit in the previous sections.
Transactions to and from non-American banks
When you want to transfer money between banks, these are called wire transfers.
Very often, if these transfers are not within the same bank institution, you will need to pay a fee, which is much higher if the transfer involves a non-American bank. In fact, in some cases it requiers additional bureaucracy or it is straight not possible to do.
The way to go around it is to use online banking. As I mentioned earlier, SoFi and Wise communicate very well and transfers are free and really fast (usually take 24h).
What I like about the SoFi-Wise combo is that Wise can handle multiple currencies and has a very low conversion fee. This means that when you go back to your home country for the holidays, you can transfer your USD from SoFi to Wise and pay using your Wise card, avoiding the quite high conversion fees of American Banks.
Venmo and Zelle
Venmo and Zelle are two apps that you link to your phone number. This means that you can easily transfer money using the handle of your friends.
Many small commerces also use either or to accept payments. You will often see that in food trucks and sellers in farmer markets.
The "problem" is that transfer is so incredibly easy, as it does not require any authentication, and it is not done through a bank, that scammers have become very cheeky. Just keep your eyes open and use common sense.
NOTE: It can happen that the previous owner of your phone number had a Venmo or Zelle account that didn't unlink when they changed their phone number. If this is the case, you will need to contact Venmo or Zelle to inform about the change of ownership of your phone number.
To credit card or not to credit card?
Credit card use can be tricky.
There are some commerces that will apply a fee if you purchase something using your credit card. These are usually small shops.
Online platforms such as Bilt, a platform to pay the rent in some condos, will also impose a fee if you use a credit card.
The general recommendation, if you buy online, is to check for additional fees when you choose to pay with credit card.
Paying with a debit card rarely adds a fee, but you won't get the juicy cashbacks.
However, you NEED a credit card when renting a car. Really very few companies accept debit. In Philadelphia I found none. And why? I assume this happens because they can charge your credit card independently whether you have enough money in your bank account. So, if you return the car totaled, they can charge you the costs independently if you can pay them or not. It will be your problem to figure out how to get the money.
Independently of these little details, credit cards usually offer more protections to the buyer. If there is any fraudulent transaction, you can easily contact your bank to get the money back before you pay your credit bill. This is more difficult in debit cards, because their use deducts the amount directly from your account balance and once this is done, banks are more reluctant to offer reparations.
The End
This is the end of the post!
I hope you have learned something and your financial start in the US is easy and smooth!
Good luck!
Need help settling in? Contact me!