ou may be a broke college student living amid a global pandemic, but that doesn’t mean you can’t start building credit. As you transition from a young adult to a grown adult, credit becomes a pressing subject and the range of knowledge on it is wide. For finance and accounting students, the need for credit and how to start assembling it may seem obvious. But, for the rest of us, there may be a lot of mystery and ambiguity surrounding credit.
What do I need it for? How do I get it? And, perhaps the most significant: At what age should I start building credit? It’s like anti-aging cream and 401k’s—You know adults use them, but that’s about as much as you do know. Throughout this article, all of these questions will be answered so you feel prepared to take on adulthood and your personal finances! Life can be hard enough without any unexpected surprises, so you want to take all of the precautions necessary to set yourself up for success. So, wherever you’re at right now, take a deep breath, and come on this educational journey. It will only take a few minutes, but the payoff will last a lifetime!
Why You Want to Build A Good Credit Score
A good credit score is key for a lot of important things in life. When you go to apply for a car loan, a mortgage, or credit cards, your credit score will be the difference between acceptance and denial. However, a good credit score may play a role in your life in ways that you had never thought of. After graduation, when you go to apply for an apartment for the first time without your parents' help, some rental properties will use your credit score as a determining factor in their decision to rent to you. Similarly, your credit influences whether a cell phone provider gives you financing for a phone.
When Should You Start To Build Credit?
The sooner you start to build credit, the better. This is because building good credit takes time. If you were looking for a more specific answer than that, we’re sorry to disappoint. There is no one, perfect age where everyone should start building credit. However, 18 is the minimum age for financial products like loans and credit cards. So, if you start building credit sometime in college, even if you don’t start right when you’re 18, you’ll benefit after graduation when you start doing things independently, such as applying for apartments, leasing a car, or taking out a loan.
When it comes time for them to check your credit score, you’ll feel confident and proud knowing you’ve passed the test. If you haven’t yet built credit, it’s not the end of the world, but you’ll need some help from a trusted person in your life who has good credit.
How to Build Credit In College
Use a Credit Builder App
If you can't build your credit by chipping away at loans yet, a credit builder app can help fill the gap. Credit apps like Chesse help consumers build credit using an installment loan. When you make your monthly repayment, you end up getting your money back at the end of the term with a higher credit score to boot!
Become An Authorized User
A great way to start building credit while you’re still in school is to have one of your parents or guardians add you as an authorized user on their credit card. Becoming an authorized user allows you the benefit of your own credit card, but with the credit limit of the primary cardholder. As an authorized user, you won’t have any legal responsibility to pay off the credit card debt. In fact, you don’t actually have to use the card at all to reap the benefits of the use on the account by the primary cardholder.
If this option is appealing to you and your parent or guardian is on board, check that the credit issuer reports authorized users to credit bureaus as this is not the standard protocol everywhere. You won’t see an effect on your credit score unless an authorized user is reported which would defeat your purpose for becoming an authorized user in the first place.
Open A Student Credit Card
Card issuers understand how unique life as a student is. Not only do you have to build credit while already having more debt than income, but you have to be able to cover your daily living expenses on a really limited budget. It’s for this reason that card issuers offer special student credit cards tailored to the needs of a college student.
Most credit cards require you to disclose your credit as a prerequisite to issuing a new card. However, student credit cards were designed with the understanding that this is likely a first credit card for the applicant and so no previous credit history is required. As well, these credit cards often offer school-related perks, like cash back for good grades.
Other benefits offered with some student credit cards include rewards for making payments on time. If you use a student credit card responsibly, recognizing that they’re not a free pass to buy anything and that payments need to be made on time, they can be a great way to build your credit as you further your education.
If this sounds appealing to you, you may want to see whether you prequalify for a student credit card. Check out the CardMatch feature to get matched with a card that best fits your needs! There’s no affect to your credit score by using this tool.
Open A Secured Credit Card
Another option for building credit if you have no credit history or if your credit history has some low points is to open a secured credit card. Because of the way these cards are set up, securely and much like a debit card, it poses no risk to the card issuer to guarantee cards to individuals who may otherwise be denied from an unsecured credit card.
With a secured credit card, your purchases are backed up by your own cash, paid in the form of a deposit. This deposit will function as all or part of your credit limit. The key difference between secured credit cards and debit cards is that activity on the secured credit card is reported to credit bureaus, and in turn affects your credit. Thus, switching from a debit card to a secured credit card for small everyday purchases like groceries and toiletries is a great method to start building credit and secure yourself access to unsecured credit cards in the future.
General Advice
Get A Cosigner
Just as you have someone cosign for your student loans, you can have someone cosign for your credit card. However, unlike a loan, having a cosigner is not always necessary. If you are under 21 and don’t have a substantial income, it is likely that you will need a cosigner to get a credit card.
When you open an account with a cosigner, you are the primary cardholder. You’re responsible for the payments charged to the card and all bills will be mailed to you in your name. However, in the event that you miss payments, your cosigner will be responsible for paying your debt which is why getting someone to cosign can sometimes be difficult. Agreeing to be a cosigner is a big responsibility and risk-taking endeavor.
Don’t Apply for Multiple Cards Simultaneously
So, you’ve just been approved for your first credit card. Woohoo! And, now you’re tempted to apply for another. Don’t do it. It’s not a good idea to apply for multiple credit cards within a short time span for numerous reasons.
First, if a card issuer sees that you’ve applied for multiple credit cards within a short time period - and they can see this - it will be interpreted as a red flag. As a matter of fact, some card issuers have policies which explicitly discourage multiple applications. By the same token, the more credit cards you add to your wallet, the greater chance you give yourself to dig your way into debt. As a full time student who only works part time - if at all - you want to be using your credit card sparingly in order to stay on top of payments. Increasing the amount of cards you have will likely increase how often you use them, and this could lead to debt that you’re unable to pay off.
Contrary to intuition, applying for multiple credit cards is not good for your credit. This is because each time you apply for a credit card, the credit issuer makes a hard inquiry into your credit report. In the short term, these hard inquiries lower your credit score and in the long run multiple credit inquiries can give you the appearance of being a credit risk.
Maintain A Good Payment History
So, you might be wondering: What factor carries the greatest weight in determining your credit score? The answer is keeping up with your credit card payments. The point of a credit history is to show that you live up to your word of payment and repayment. Loan vendors, landlords, banks, car dealerships and credit card issuers want to know that you can use credit responsibly and paying your credit card bills on time every time is the best way to portray yourself as a solid candidate.
It makes sense then that 35 percent of your credit score calculation is based on payment history. At its core, using credit responsibly comes down to making purchases that you can pay off. It’s super tempting to buy big-ticket items and promise to pay it back later, but if you don’t think you can have it paid off within the next two payments, it’s probably not a good idea. Besides, you may want to save your credit for a time when you may really need it, whether it’s an emergency situation or a big bill.
Think of the items that you regularly pay for in cash or with a debit card. Maybe that’s your wifi bill, groceries, or haircuts. Whatever is in your monthly budget, take a chunk of it and use it for your credit card. We recommend something boring like household cleaning supplies, and steering away from things you consider fun. If you’re really into new technological gadgets or clothing, and you start to use your credit card to pay for these items, you may find it hard to stop and spend more than you normally would, leading you into a debt that you cannot easily repay. So, save the exciting purchases for where the money feels more real – your debit card. By doing so, you’re more likely to spend within your budget.
Use Your Credit Card Responsibly
Like all good things, spending must be done in moderation. You may think that in order to get your credit score up fast, you have to use your credit card a lot. However, credit scores are based on consistent account activity, not high overall numbers. Coming in close behind payment history for credit score calculation is credit utilization.
Equally as important as paying your bills on time, is not overcharging your card. Credit utilization refers to the amount of your credit limit that you’ve used. For example, if your credit limit is $1500 and you’ve charged $400 to your card, then your utilization would be about 27%. It’s recommended to keep your credit limit no higher than 30% of your available credit. So, in this example, you wouldn’t want to spend more than $500 at a time. You want to have credit as an option, but you don’t want to be dependent on credit.
If you’re afraid you may give into temptation and break this rule, then put in a conscious effort to treat your credit card like a debit card. Only make purchases that you know you can pay off. Starting off with good credit habits will make them easier to maintain over the long run. By keeping your credit utilization low and regularly paying off your credit card purchases, you’ll keep your credit account active and your credit score up!
Keep An Eye On Your Account
These days, you can monitor your credit card account through an app on your phone. There’s no excuse to not keep up with your purchases, rewards, bills, and due dates. Neglecting clicking that one button on your phone to check your account is a sure fire way to miss payments, lose track of your spending, and brush over fraudulent charges.
In the case that you do notice a fraudulent charge on your account, you will want to report this to your card issuer immediately. By reporting the suspicious behavior in a timely manner, you allow the issue to be resolved quicker and for your real credit score to be recovered.
Check Your Credit Report
As you begin to build your credit score, go ahead and check your progress. What’s helping you? What’s hindering you? You can request a free copy of your credit report from each of three major credit reporting agencies – Equifax, Experian, and TransUnion. Additionally, depending on what credit card you get, you may be able to check your free Fico credit score even more frequently. Checking your credit report will help you stay on track with keeping your credit score on the rise.
The Bottom Line... It's Never Too Early to Work on Your Credit Score.
Get an early start on building credit and building healthy spending habits. Start in college. This will help you achieve financial goals and obtain products during and after college, as well as help you achieve the things you will need in the future at a lower interest rate. Follow this guide and your future will be looking bright. Happy spending!
