Americans and Canadians are often criticized for their reliance on credit cards. Anyone who has lived in the US or Canada can attest to the vast amount of credit card offers. Banks advertise endless lines of credit. Credit card companies are often on college campuses, preying on financially-illiterate young adults. Department stores even offer credit cards for their most loyal customers. The credit card obsession is an easy target for international spectacle, but one factor puts it in perspective: credit scores. For expats, maintaining a high credit score abroad can make the transition home easier.
Canada and the United States use credit scores similarly, with only minor differences. A credit score tells a bank if the borrower is responsible enough to be trusted with money. The score is calculated on a few criteria. The most important are how long you have had a line of credit and your ability to pay the bill on time. Credit cards, when used responsibly over many years, help Americans and Canadians build a credit score. An excellent credit score can mean the difference between getting a home loan for a low interest rate, or having to rent for another year.
Credit Scores in the Czech Republic
Good news is all around for American and Canadian expats with poor credit scores and moving to Prague. Czech banks do not calculate loan risk based on a credit score. Banks use other measures to determine risk. They will usually look at proof of employment and currently available funds. Unlike in the US or Canada, Prague’s landlords do not examine credit scores.
Culturally, Czechs are debt-averse and avoid taking out credit cards or loans for small purchases. Free higher education eliminates the need for student loans. A mortgage is the only debt a Czech will typically acquire.
Five Steps to Improving Your Credit Score Abroad
Credit cards are a tool that can open doors to financial opportunities in countries which implement credit scores. Many expats have plans to eventually return home, and are concerned about maintaining, or even improving, their credit score while living abroad. This is still possible, even if you do not live in the US or Canada. Follow these steps while living in Prague, and your improved credit score can be waiting for you when you return home.
1. Keep your home country’s bank accounts and credit cards active
Make sure to use checking and savings accounts often enough so they are not closed due to inactivity. Keep your credit card active while abroad to help your credit score. If the current card has a high foreign transaction fee, switch to a more expat-friendly credit card. When asked at a pay terminal, always select CZK (instead of USD or CAD) for a better exchange rate.
2. Keep an address in your home country
Access to American or Canadian banking and credit card systems is usually reliant on having an address. It can be difficult to open a credit card from abroad, even for citizens. Many expats use a relative’s address to continue receiving mail. This address also usually acts as the “permanent address” on Czech documents. Paying for a mail-forwarding service is another option.
3. Pay off monthly balances in full, and on time
Credit scores are essentially report cards on financial behavior. Banks and other lenders like to see borrowers are able to control themselves. Only spend an amount you can pay off at the end of the month. Late fees and outstanding balances can ruin a credit report.
4. Do not use the entire line of credit each month.
The credit utilization rate determines the percentage of available credit you use on average. A low rate is favorable. For example, if a bank allows $5,000 of credit each month, spend $2,500 or less monthly. Banks consider using all or most available credit as a high risk activity. Set up autopay for bills like Netflix or Spotify, so the American or Canadian account can continue to accrue good credit while the credit utilization rate remains low.
5. Go Paperless
The bank may need a physical address in your home country for account purposes, but most communication can now be done online. Have the bank’s app downloaded on your phone to receive alerts. Online communication is faster and is more ecologically sound, with less paper to print and less mail to ship overseas.