Debt and borrowing
If you are an expat and want to open a bank account, borrow money or want any form of credit, then you need to establish a credit history. Your credit rating sets how much you can borrow and the rate of interest you should pay. You could have an impeccable credit rating in the UK, but that does not move with you when you change countries.
The first step in establishing a credit history in a new country is registering to pay income tax and social security. Every country has a social security or tax identification procedure. Only residents can obtain the number and they cannot legally work or stay in a country without one. Nor can they open a bank account or arrange credit.
Opening a bank account
Expats need a bank account denominated in the local currency for day to day spending. New bank accounts may come with restrictions. In America, accounts are blocked for at least 90 days to stop crooked customers bouncing cheques and moving on.
Most countries will flag expat accounts for a month or more to limit the number of transactions or the amount of money passing through. Some banks will want expats to open a savings account with a deposit so they have some cash to hand if the account is not managed properly.
If your UK bank has an offshore branch or links with another bank in your new home, then open an account with them as you will already have a credit rating.
See Banking and Money Transfers for more about offshore banking
Expats and borrowing
Many banks will not lend to expats until they have spent at least six months or a year in their new country.
If you want a mortgage, try a credit card first to build some trust and to show the bank that you can manage your money. The card should have a low credit limit so not to tempt over borrowing and to keep interest costs down as the rate is likely to be higher than you would like.
Some credit card providers consider customers ‘over extended’ if they spend more than 50% of the credit limit each month.
Having a local credit card has some advantages for expats. Many UK providers are refusing or withdrawing credit cards with an offshore billing address, so a local card is a useful back-up for emergencies and a way to spend money without going through costly currency exchange.
Online retailers often decline payments with a credit card from a country where you do not live, even if the billing address is the same as the delivery destination.
And meanwhile, the sensible spending and paying off the balance builds a credit history.
Expats in the UAE can now find out their credit score from Al Etihad Credit Bureau by presenting their Emirates ID and paying a small fee of AED60. Your credit score is calculated by analysing your spending and payment behaviour and helps lenders to predict your ability to pay.
Borrowing in the UK while living abroad
Tighter regulation has stopped banks and building societies offering buy to let mortgages to expats.
Some specialist lenders will offer funding on strict terms and a few wealthy expats with good credit ratings may find their bank offers a deal.
Many lenders have pulled out of the market, leaving Skipton International, based in the Chanel Islands, as the leading provider.
Most of the better-known banks and buildings will not offer credit to expats because of ‘know your customer’ rules designed to stop money-laundering, which tends to mean anyone living outside the UK is turned away.
Even those offered a loan must pass tough affordability tests, especially if the UK borrowing is in Sterling, as exchange rate risks are also considered. A volatile exchange rate could impact on how much an expat owes on a loan and the amount of monthly repayments.
Offering security for loans
Banks are generally comfortable with mortgage borrowing by expats, providing the property is in a country where the bank has a branch. This makes seizing the property easier should the expat default on the loan.
Expats are unlikely to find unsecured borrowing unless they can offer security for the loan.
Typically, a bank will offer a loan as a percentage of the value of the security offered. Assets considered as security could include cash, investments, life insurance and property. The loan to value to expect depends on how easy the asset is to sell.
Managing debt overseas
Lenders will expect expats to have a responsible attitude to debt, but will quickly resort to the courts if they are concerned their money is at risk.
Running up excessive borrowing is not a good idea.
Some countries that rely on large numbers of expat workers have strict debt rules because they have seen them leave the country without paying back what they owe.
The penalties can range from fines and seizure of assets to a term in jail.
The Gulf States, such as the United Arab Emirates, Qatar and Kuwait, have a network that stops an expat with debt abandoning what they owe in one state and then moving to one of the others.
They also have agreements with most North African and Middle East countries from Morocco to Iraq, England, France, India, Singapore and China. Courts in each country have the power to transfer the debt overseas, which could see a debt collector knocking in your door if you owe money somewhere else in the world.
Do not contemplate travelling to any of the Gulf States if you have fled debt as the police will arrest passengers on airport stop-overs.
For debt advice in the UAE visit savingmemoney.ae or talk to us!
Dealing with debt at home from overseas
Just as some countries have the power to deal with debt overseas, some British institutions can also chase debtors around the world.
The authority with the longest reach is probably HM Revenue and Customs (HMRC).
Agreements with other nations allow HMRC to pursue tax debts overseas to many countries.
Another government agency with a long reach is the Student Loans Corporation (SLC).
Anyone with a student loan moving overseas for more than three months is advised to tell the SLC and discuss their repayment options.
For those that do not speak to SLC before departing the UK, the risk is the SLC will set up a punishing repayment schedule of twice the average income for the country where they live, plus default charges and interest.
Banks and credit card providers have less success chasing debt overseas.
If an expat leaves assets in Britain, they can apply to a court for a charging order or a warrant to seize them. If the bank or other financial institution has a presence in the country where an expat has moves to, they can look to the courts there to enforce payment.