Setting the foundation for a strong credit history while you’re in college is a great way to get a jumpstart on a lifetime of smart money management and living debt-aware. Many college students don’t realize that there are a plethora of low interest, high return credit building opportunities available for students and students alone – and the key is knowing where to find them. In addition, having a lot of money doesn’t equal good credit; in many ways, it can put you further in debt. If you start out small, while you’re in college and likely not making tons of money, you can really set yourself up for a strong credit future. Here’s how it’s done.
Why Credit History Matters
You may be wondering why you need to worry about credit at all. When you get out of college, or even while you are studying, you may decide that you want to buy a house or take a large personal loan for a gap year. Without a good credit history, banks will not grant you the money you desire. Your personal credit history will show banks and lenders that you can take on a loan or line of credit and pay it back in a reasonable amount of time – essentially that you know how to manage your money and stay out of extreme debt.
According to FICO, the median credit score in the U.S. is at 723. Borrowers in this range are only delinquent 5% of the time. Anything in the mid 700’s and higher is considered excellent credit, and will be greeted by easy credit approvals and the very best interest rates.
You don’t have to have high credit limits, own a house or a car, or take out large loans to build a credit history. The absolute best thing you can do for your credit history is pay your bills and your debts on time, and keep your credit score at around 700 points or higher.
Credit Building Options
There are a couple of different ways you can go about building your credit. The obvious ones, like buying a house or a car, are probably out of your price range, and your comfort zone. Others, like obtaining a credit card, can seem risky. Even putting a utility or other bill into your name might not be a viable option. Because there are so many variables, there is not one solution for everyone, but there are some options and tips that everyone can examine and use.
The main ways to obtain credit are:
- Obtaining and using Credit Cards
- Making some sort of Big(ish) Investment or Purchase
- Putting your name on your Living Expenses
- Taking out a Personal Loan
Managing and Understanding Credit Cards
Let’s start by talking about credit cards. Credit cards are the obvious way for you to begin building your credit, but they are also easily abused. There are four main ways you could go about getting a credit card while you are in college.
You could ask your parents to make you an authorized user on one of their cards. This would protect you from going too far into debt since your parents would help you keep an eye on your spending, and they would be partially responsible for your debt. Another option would be to open a secured credit card. These cards are usually obtained through your bank and the bank requires you to put a certain amount of money into a savings account as collateral for the card. If you do not make your payments on time, they will take the money from your savings account to pay off your debt. You also cannot spend more than is in your savings account. Essentially, this card works almost like a debit card, but allows you to build your credit in the meantime.
Many banks also offer special credit cards for students, and this is a great option for obtaining your first card. Student credit cards often have low interest rates, lower limits, and they will be more forgiving on credit requirements such as evaluating your credit score when you apply for the card.
A last option for students wanting to obtain a credit card would be to get a card with a very low credit limit from a store you shop at often already. These cards are great because they usually have low limits and you can only use them in one place, which means you’re less likely to go into extreme debt or spend over your limit.
Here are a few tips to use when you are seeking out the right credit card:
- Don’t get a card with an annual fee
- Don’t fill out any credit card application that come to you
- Seek out the credit card you want on your own
- Talk to your bank and learn your options
- Choose a card with benefits like cash back or redeemable points
Responsible Credit Card Usage
Now that you’ve decided to get a credit card you must use it correctly! Do not over spend or get yourself into such deep debt that you cannot get out. Here is how you can manage your card successfully and really build a strong credit score while you are in school.
- Do get a card with a low credit limit, one that you can handle.
- Do pay 1-2 bills on this card or use it for just one purpose, like groceries for example, and pay the card off every month
- Don’t use your card for impulse purchases, so leave it at home when you go shopping and away from your computer when you’re browsing on amazon
- Don’t get cash advances, which always have higher interest rates. If you need the cash, you have a problem that should be solved without credit.
You should also know that the Credit CARD Act put a limit onto the spending by college students, including banning approvals for anyone under the age of 21. According to Credit Card News the annual average credit card balance of all student cardholders in 2015 was $906; younger students (age 18-20) carried a significantly lower average balance ($611) than students aged 21-22 ($1,013) or 23-24 ($1,109).
These are all manageable balances for most college students. Still, at the end of the day, credit cards can be dangerous business and there are other, usually more manageable ways, to build your credit without getting a card. In addition to credit cards, there are still three other ways to build your credit while in college. These tips will especially suit your needs if you are working and have a little extra income:
Big(ish) Investments or Purchases
True, you are probably not ready to buy a house, or even a car. But there are ways you can make a big(ish) investment or purchase to help build your credit. Let’s say you really need a new laptop. Consider buying the laptop on a credit program that you can pay off monthly over the period of one year or less. The best way to keep your purchase debts manageable is to not purchase more than you can pay off in six months to a year.
Perhaps you have a utility or cell phone bill, or other monthly payment that your parents help you pay. Consider asking them to move that payment into your name and set up a way that you can both agree on to contribute. This could mean that you give your parents a portion of the sum due each month or the other way around, but having these bills in your name is a great way to start getting your on time payments in the financial history books.
The best way to take advantage of personal loans is to use your student loan debt to your benefit. I’m sure that most of you reading this guide have some sort of financial aid debt, or will have some in the near future. Financial aid debt can be scary, but it can also work to your benefit if you take the time to leverage your student loans. Pay off your loans, or pay towards your loans, consciously and smartly, in the best ways possible. Consider putting a few dollars a month towards your loans while you’re in college. And if you can’t do it right away, when you do begin paying off your loans, pay just a little more than the minimum each month. It doesn’t have to be a lot, but anything over the minimum due will not only help you pay off your loans sooner, but it will also do wonders for your credit score!
Check Your Credit Regularly
The Fair Credit Reporting Act means anyone can check their credit up to three times a year at three different credit bureaus free of cost. This is a great way to stay on top of your score. Use the Annual Credit Report website. From there you can gather your report from Equifax, TransUnion and Experian, three of the largest and most widely used credit bureaus in the United States.
Above all, remember to not go in over your head. A good rule of thumb when considering taking on a debt while in college is to ask: Can I pay this debt off in less than a year. If the answer is no, then you’re probably not ready. Utilize your colleges financial aid office to ask for spending, buying, debt, loan and credit advice. Be smart with your money, and let your money work for you.