How to Build Credit as a College Student
September 19, 2019 |
College prepares you for a lot of great things in life: how do to research, how to be (at least somewhat) self-sufficient, how to manage your own schedule and resources and how to write many, many papers.
But there are a few life lessons that seem to be left out of most college curriculum’s these days. Take building credit, for example. We all know we need to have good credit to do and buy the things we want (homes, cars, credit cards with low interest rates). But how does one actually build credit? And is it possible to build good credit while still a college student?
You bet your GPA it is.
So bust out your notebooks, pens, and calculators and let’s get this class in session.
What is “credit?”
Credit is money you borrow from a credit lender (like a bank, credit union, credit card company, or other financial institution) to purchase goods and services. You have to pay back the money you borrow, plus any agreed-upon fees (like interest rates) by a specific time. The more responsible you are with the money you borrow, and the better you are at paying it back on time, the higher your credit score will be.
The better credit score you have, the less of a risk you are to lenders, and the better interest rates you’ll get on big purchases like homes and cars. And when you have lower interest rates, you end up paying less than someone else who has high credit. Having good credit can also benefit other parts of your future as well, and can help you get better insurance rates, put you in a better light on renter applications, and could even help you win that great job.
How do I start building credit?
The easiest way to start building your credit is with a credit card.
If you’re under the age of 21, you either need to have proof of a steady income or have a cosigner over the age of 21 to even qualify for a credit card. Back in the day, it used to be super easy to get a credit card as a college student, but most of those cards had predatory loan rates and put a lot of college students in an unnecessary amount of debt. The Credit CARD Act of 2009 pretty much put a stop to that.
You can also ask your parents to become an authorized user on your account. This is another way to help you build your credit, and is a good option if you need help from your parents to pay off your card debt. Being linked to your parents’ good credit will also give your own score a boost.
When you start looking for a credit card, don’t just pick one that looks and sounds good, and has good opening perks. A lot of credit cards will give you a discounted interest rate (or no interest rate at all) when you open, but the fine print will show that after a certain amount of time, that interest rate will skyrocket. And any balance you carry will be charged that new interest rate.
A no-frills, low interest rate card might be the right option if you’re still getting into the habit of paying bills monthly, or if you think you’re going to need to carry a balance due to your financial situation. A rewards card might sound cooler and more fun, but they tend to come with high interest rates, and carrying a balance with them could make it more difficult to pay off in the long run.
When you get your credit card, try to use it for small purchases, or your smaller recurring bills. For example, you could put your Netflix and Hulu accounts on your card. Having a card is a great start to building your credit, but to really get your credit up, you actually need to use the card. So, be sure to use it regularly to maximize the benefits of having it at all.
And unless you have an emergency, avoid big purchases on your card. It might seem easy to just charge next semester’s tuition to your card, but you still have to pay it off, and now you have to do it with added interest on top of it. Emergencies — like car repairs or medical bills — are a different story, as few college students have a rainy day fund to cover expenses like those.
The next step to building your credit is to pay off your bill every month, on time. There’s a wide-held belief that carrying a balance on your card will help you build your credit, but in most cases, the opposite is true. Paying off your credit card bill every month (and we can’t stress this enough — on time), shows that you are a responsible borrower and that you are only borrowing money that you can afford to pay back.
Set an alert on your phone to pay off your bill the day before your bill is due to show your responsibility. Or even better, see if you can set up auto payment for your credit card so it will pay off your balance each month without you having to think about it.
What can break my credit?
There are lots of things that can bring your credit score to a screeching halt. Not paying your credit card bills on time is a big one, so make sure you prepare yourself for that before you even start your credit card application.
One of the big mistakes college kids can make with their credit is co-signing a friend’s credit card or loan. If your friend slips up and goes into default with their payments, the credit lender will come after you as the co-signer, and that could really damage your credit.
Signing up for lots of credit cards will also cause a dip in your credit score. As you get older and are more financially secure, having multiple lines of credit can be a good thing, but when you’re still in college and eating Ramen while logged into your parent’s HBO account, having one credit card is plenty. The more cards you have, the more debt you could get into, and if you can’t afford to pay off the balance of all those credit cards every month, you could be in some serious trouble. Even applying for several cards all at once causes red flags on your credit, and your score will drop.
And one way that you’re building credit that you haven’t thought about — your student loans. You may not have to pay them back yet (though you should consider starting to pay them while you’re still in school, if you can afford it), but you will eventually. If you’re taking out student loans for non-educational purposes (and no matter how much you want it to be, spring break in Cancun is not an educational expense), then you are creating more debt than you need. And it could be harder to pay off a larger amount when you do graduate.
Also, when paying off your student loans, pay more than the minimum each month if you can. Not only will it help your credit, but the extra money goes toward the actual balance of the loan and not to the interest. And if there’s a smaller balance, there’s less interest to pay. So it’s a win-win.
Now. we realize that we just spewed a lot of information at you all at once — not unlike every professor ever — but if you’re able to keep at least some of these points in your head, you’re well on your way to establishing excellent credit. And that means better jobs, and a bigger home, and cooler vacations and…