Building Good Credit: A Guide for College Students
Having good credit is essential for many of the big purchases you’ll make in life, like cars or a house, and may even be necessary for job or rental applications. However, it can be difficult to determine how to start building your credit. Look no further! We have compiled seven tips on how to build good credit while you’re in college.
1. Become an authorized user on a family member’s account
Becoming an authorized user on a family member’s credit card can be a significant first step to building your own good credit history. You can begin to establish credit history at a younger age than waiting to open your own card—and the length of your credit history is an important factor in building a high credit score. As an authorized user, you’ll be able to utilize the credit card for purchases and payment history reports to your credit, but the ultimate responsibility of paying the charges falls to the primary cardholder. As long as your family member has good credit, and both of you are responsible when it comes to purchases and repayments, this can help you start to build your credit. Talk to a parent or another trusted family member about adding your name to their credit card account as an authorized user.
2. Open your own credit card account, but just one
Another great way to start building good credit is to open a credit card account in your own name. This can be tricky as a student because you don’t necessarily have a full-time job with a steady income, which may be a dealbreaker when a lender looks at your application. However, some companies do have student-specific credit cards.
Another option if you have no credit history is to open a secured credit card. It requires a cash deposit equal to your credit limit while the card is open, and you can get that cash back when you close your credit card account. If you have the money to set aside as collateral, this can be the easiest way to open a credit card if you have bad or no credit history.
Do your research to find a credit card that will suit your needs the best, but don’t open multiple cards at once, as this can negatively affect your credit score. Lenders tend to see people with shorter credit histories and more lines of credit as risky borrowers.
3. Use your credit card for occasional, small purchases
One of the most responsible things you can do with your new credit card is to use it to make small purchases. It can be tempting to use it to splurge on things you might not otherwise be able to afford, but there is a more substantial risk of falling behind on your credit card repayments this way. Buying a tank of gas, a week of groceries, or other occasional small, but necessary purchases and then paying off the card right away is an excellent way to show lenders that you are a responsible cardholder. A good rule of thumb is to spend no more than what you can pay now and use the credit card for a bigger expense only in an emergency situation.
4. Keep your credit card balances low
In addition to the previous point, it’s important to keep your balances low. Don’t max out your line of credit, especially if the line is relatively new. Credit utilization can be a good indicator of how well you are able to honor your debt repayments. The general agreement by experts is to keep your credit card utilization under 30%. Credit card companies may increase your line of credit as you prove your financial stability or you may request to increase your line of credit. This can cause your credit card utilization to drop, but be cautious. Don’t be tempted to put more on the credit card, especially if you have had any late payments or if you’ve only made minimum payments.
5. Only use student loans for education expenses
Many college students use financial aid to pay for their education. This can include federal and private loans. It can be tempting to take out more money than you need to pay for your tuition and room and board, but try to only borrow what you need to minimize your debt. Making payments to your loan while in school is a great way to show potential lenders that you are financially responsible and can also give you a head start on repaying your student loan debt. There are a couple of options when it comes to payment:
Deferred Payments: With deferred payments, you don’t have a payment each month. Instead, you’ll start paying your accrued interest and principal after you graduate. Some lenders will allow you to make payments while you’re in school with no penalty and no minimum payment amount.
Fixed Payments: In most cases, lenders give you an option to start making payments on your loan while you’re in school. These payments are usually a small, manageable amount like $25. If you’re able to commit to paying this each month, it is a great way to demonstrate your financial responsibility and improve your credit score. Keep in mind there are penalties if you don’t pay each month, and missed payments will negatively affect your credit score.
Interest Repayment: This is another way to improve your credit score but can also have negative effects if you don’t pay on time. Interest repayment consists of repaying accruing interest on the loan each month. This can minimize your total loan cost in the long run. These repayments tend to be more than a fixed payment and can change each month if you chose a variable interest rate.
6. Pay your bills on time
In the past few years, credit bureaus have started accepting rent and utility payments to go towards your credit score. If you’re already paying those things on time, it can be an easy way to show your credit responsibility and help your credit score. Check with your landlord and utility companies to see if they have a way to report your payments to credit bureaus. Something else to keep in mind is to make sure you’re paying any outstanding bills like library fines, traffic tickets, or doctors bills. Although these types of bill payments do not get reported to credit bureaus, if they get sent to collections, that will be reported and negatively affect your credit score.
7. Use a share secured loan for a large purchase
As discussed, having a credit card, which is an open-ended line of credit, is a helpful type of loan when you’re starting to build credit. However, it is also important to have several different types of loans in your credit history. If you’ve saved up for a large expense, such as buying furniture, a car, or a computer, consider using a share secured loan with a term of 12 months or more.
This type of loan uses your savings account balance as collateral for a loan of the same amount. Because a share secured loan is of low risk to lenders, it’s easy to get approved and you’ll have a low interest rate. It may seem counterintuitive to take out a loan to pay for something you’ve saved up to buy in cash, but this gives you an opportunity to add a closed-end loan to your credit history. As you make on-time payments each month, you’ll be building good credit history and improving your credit score. Plus, each payment that you make is continuing your good savings habit, since paying off your loan releases your pledged savings balance back to you.
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