How Your Credit Score Can Impact You Abroad
If you’re leaving the United States with significant debt, student loans and bankruptcies, you won’t likely run into credit issues abroad. That said, there are some notable exceptions. And if you ever plan to return to the U.S., you have to think carefully about how you’ll live overseas.
How other countries view credit histories
An individual’s credit history doesn’t follow him or her out of the U.S. after an international move, according to Katelynn Minott, a Boston-based CPA and partner with the firm Bright!Tax, which specializes in providing tax preparation to expatriate U.S. citizens living in 190 countries. Your credit score and credit history will affect you in the U.S. only, she said. Each country tends to have its own unique credit history and scoring system.
While some credit bureaus such as Equifax have overseas offices, the credit departments don’t “talk” to one another, to the best of Minott’s knowledge. According to Equifax, credit reporting differs due to different data protection laws in other countries. Also, agencies only hold information relating to addresses in that specific country.
That said, your credit history may follow you overseas — for good or bad.
6 ways a bad credit score can impact you abroad
- You may not qualify for international financial services benefits. For example, the American Express® “Global Card Transfer” allows existing American Express® cardmembers to apply for a new card in a new home abroad. But approval is subject to credit and fraud checks, as well as a review of international American Express® account history. Some banks have international locations and support, or offer international funds transfer without transfer fees using a mobile app or online services. If you’re a client in poor standing, you won’t be as likely to qualify, so you may wish to improve your credit score before applying.
- Public records risks. In the U.S., bankruptcy filings remain on your credit reports for up to 10 years and have a very negative impact on credit scores. “Bankruptcy matters are handled in U.S. federal bankruptcy courts,” Minott said. “There’s no such thing as an international bankruptcy.” However, bankruptcy proceedings are public records, so a particularly inquisitive overseas lender could theoretically turn up a bankruptcy if performing a deep investigation. However, it’s unlikely.
- Overseas activity. Even if you don’t have a bad credit score, U.S. citizens may find their accounts frozen if the bank notices overseas activity and an overseas address, Minott said. Clients with a foreign residence often have additional reporting standards associated with the country that they live in, which can make it costly for banks to stay in compliance. To facilitate client travel, more banks are making services available to expatriates, and fewer U.S. banks are charging foreign transaction fees. So it’s possible to maintain your U.S. accounts and banks that way.
- The price of ignorance. Even if your poor credit history isn’t impacting you now, debts don’t disappear just because you’ve left the U.S. for a while. “You can’t run away and come back later, and have bad credit history wiped clean,” Minott said. Bad debt stays on your credit record for as long as the law requires. If you’ve left with a poor credit history, then don’t maintain U.S. credit accounts, you aren’t repairing your credit history while abroad.
- You may have a difficult time buying a home overseas. Because there are such limited ways to purchase a house in other countries, you may need to rely on a home equity or personal loan from an American bank, which could be harder to acquire if you have a poor credit score. Other options include paying with cash or drawing on your retirement savings, which can have huge tax ramifications.
- Student loan defaults. Don’t ignore your student loans. Missing as few as three private student loan payments, or nine federal loan payments, can cause default, and defaulting on student loans can cause issues when you return. Paying off student loans when living overseas can be an interesting situation, particularly with income-based loan repayment plans. However, the IRS allows an income exclusion of about $100,000 per year for expatriates, who have a “tax home” in their host country, Minott pointed out. As a result, the individual’s adjusted gross income (AGI) could be zero. Under certain repayment plans, a lack of income (defined as AGI) may permit student loan borrowers to defer federal student loans, if desired, and possibly even obtain loan forgiveness. In the meantime, deferred student loans may still charge interest. Also, keep in mind that paying loans while away reflects positively on your credit history.
How to keep your credit healthy while living abroad
Trying to establish a bank account overseas can be challenging. “My clients have a difficult time opening a bank account not because of their credit history, but related to their citizenship,” Minott said. “If you’re a U.S. citizen, many foreign banks will shy away from you.”
Opening a U.S. bank account overseas can be difficult due to USA PATRIOT Act-related customer-identification and banking provisions. The Foreign Account Tax Compliance Act (FATCA) requires overseas banks to report U.S. citizens’ holdings to the Internal Revenue Service. FATCA attempts to thwart tax evasion by nonresident U.S. citizens who hold offshore accounts.
“The cost of reporting is huge for banks, and so it’s a huge headache to comply with FATCA,” said Minott.
As a result, even some of the largest overseas banks will avoid signing a U.S. citizen up for an account. While the law has been around since 2010, stricter compliance has been more recent — since around 2014, she estimates.
One way to deal with restrictions is to seek out a U.S.-citizen friendly or internationally focused financial institution; the United Nations Federal Credit Union is one such bank. In addition, the advocacy group American Citizens Abroad works with the State Department Federal Credit Union to provide accounts for overseas members.
Other dual-citizenship holders use alternate passports to set up bank accounts. For example, someone with both U.K. and U.S. passports might use only the U.K. passport to set up an account, Minott said.
There isn’t one method to convince overseas banks or credit card companies to allow you to open an account. However, some have had positive experiences bringing letters and statements from U.S.-based banks. Minott said she has also written letters for clients she knows well regarding their good financial history and income.
On the flip side, any overseas credit history you create with an overseas financial institution won’t follow you back to the U.S. with either positive or negative reporting, unless part of an international financial institution.
Another note: You may also be able to use your prepaid cards outside of the U.S. for purchases and ATM withdrawals, after you register your card by offering personal information to verify your identity.
The bottom line
To maintain or improve your credit score while overseas, investigate options for keeping up U.S.-based banking, credit card and loan accounts. Speak with your lender or creditor to discover potential options, even as you juggle a move and new life abroad. In the meantime, it’s possible to check your U.S. credit score — and receive updates — from anywhere in the world.