Growing up can be difficult. No one really teaches you things about personal finance, unless you were fortunate enough to have savvy parents who taught you, or you had a class in high school or college.
One very important aspect of being an adult is your credit. This is going to stay with you the rest of your life and it will be a major factor when applying for loans, auto insurance, rental applications, cell phone plans and it can even impact job prospects.
When you are in college, it is an opportune time to start building your credit and the sooner you can start the better off you will be once you graduate. Follow these 6 ways of building your credit, while in college, and be well on your way to adulthood.
Become an authorized user on a parent’s account
One of the easiest ways to start building credit as a college student is to become an authorized user on your parent’s credit cards. Mike Sullivan, former director of education for Take Charge America stated, “…unless you’re 100 percent sure they’re responsible, the first credit card that students should have is yours.”
This is also known as “piggybacking” and it allows a student to help build good credit off their parent’s accounts. This is a controversial topic, however FICO still allows it among family members.
Piggybacking is a great strategy if your parents have good credit themselves because it will give you a boost in your own credit. There are fewer risks associated with this strategy than having your own credit card because your parents will be able to track all the spending within the account.
Get a credit builder loan
This is a great option for students who want to build their credit, but don’t want the risk of overspending on a credit card. Credit builder loans are consistent, periodic payments allowing you to plan and budget for each month. These loans are also secured loans, meaning they often have lower interest rates than credit cards.
Many banks and credit unions offer credit builder loans and it is best to shop around to find the best rates. There are also online banks, such as, Self Lender, who specializes in credit builder loans.
Be weary that you do not have access to the funds until the loan is completely paid off. Therefore if you have an emergency and need money, you won’t be able to access these funds right away. Another thing to watch out for is some lenders have fees with credit builder loans. This is why it is very important to shop around and find the best deals.
Open your own credit card
If you are responsible and can provide proof of income, applying for a credit card as a college student can be a great option. Many banks and credit unions offer student credit cards, specifically for college students.
There are plenty of horror stories of college students overspending on their credit cards, but if used properly, they can be a great tool to learn good credit-building habits. Use these simple strategies to stay in line and build your credit:
- Charge only recurring bills, such as a phone bill or subscription services to your card
- Set up automatic payments to ensure paying your bills off in full and on-time every month
- Repeat for the remaining years you are in college
When applying for your first credit card, it is best to choose one that does not have an annual fee. A great option and one I personally recommend is the Discover It® Student Cash Back Card. I personally used this card all throughout college and their online app is extremely easy to use. This is just one option, there are many more out there so do your research and select the best one for your needs.
Once you choose the credit you want, make sure to stay disciplined and only charge recurring bills – and, if necessary, occasional emergencies. You’ll want to make sure your debt utilization ratio stays below 30 percent every month. This means, you should only spend 30 percent of your available credit each month to ensure you are maximizing your credit score. Going above that threshold can actually hurt your credit score.
If you are responsible with your credit card by paying on-time and staying below that 30 percent debt utilization ratio every month, your credit score will start to reflect a positive, consistent history. Your credit score will likely be in the good or excellent range and now you’ll have to keep it that way by staying responsible.
Open a secured credit card
Since the 2009 Credit Card Act was put into place, it is more difficult for people under 21 years old to qualify for a credit card. If you are unable to get approved for an unsecured credit card, another option is opening a secured credit card instead.
A secured credit card can show lenders that you are responsible and allow the lender to not take on as much risk. You will have to put an initial deposit down in exchange for a line on credit on your credit card. The line of credit you receive is typically equal to the amount you deposit. Meaning, if you deposit $500, you will get a line of credit equal to that amount.
Applying for a secured credit card will give you a better chance of getting approved over an unsecured student credit card. However, you will have to deposit money upfront and if you miss a payment, the lender can take your deposit. Be extremely responsible and you shouldn’t have anything to worry about.
Build credit with your rent payments
If you are living off-campus in a house or an apartment, you can build your credit by paying your rent on time every month. One caveat, is your landlord needs to report their rental income to one of the major credit bureaus.
Students who are living off-campus should ask their landlords or property manager if their rent payments are reported to Equifax, Experian, or TransUnion. If they aren’t, you can ask them to sign up for a rent payment service like PayLease or RentTrack, giving your landlord or property manager the option to report rent payments to the credit bureaus.
The rent payments will then be reported on your credit report and students can build their credit without ever opening a line of credit.
One thing to note is this is not a guarantee to building your credit. For one, landlords may decide to not report your rent payments and two, not all credit scoring models include rent payment history.
It is best to see if this option is available to you because you are already spending money to pay rent every month, so why not build your credit at the same time? However, if you are looking for a definite way to build credit, other options in this article will be a better option.
Pay your student loans on time
This last strategy applies more to right after you finish college. If you used student loans to help pay for college, they can be a great way to start building credit after graduation.
Typically most Federal and private student loans have a six month grace period, after you graduate, before you have to start paying them back. During that time, you may want to consolidate your students loans, but once that grace period is up, be sure to make prompt payments every month.
Remember, even just one late payment can ding your credit score, so be sure to make payments a priority. Without getting into too much detail, try and use Federal loans first, before private loans. They often provide the lowest interest rates and they don’t require an active student to qualify based on credit or income.
If federal loans are not sufficient, and they often aren’t, you will have to use private loans. Make sure you shop around for the best rates because they will vary dramatically.
Once you graduate, if you have Federal and private student loans, one of the best ways to improve your credit score is to consolidate all of your students loans in one single loan. This will reduce the number of loans with outstanding balances, which will positively impact your credit score.
As you are building your credit throughout college and after, make sure you are managing it on a regular basis. Once a year, make sure to check your credit report from each of the major three credit reporting agencies – Equifax®, Experian®, and TransUnion®
You can do this for free by visiting AnnualCreditReport.com or by calling toll-free 1-877-322-8228. Moreover, you can also get a free Experican Fico 8 score by signing up directly with Experian or from your credit card issuer or bank if they belong to the FICO Score Open Access Program.
By checking your credit score on a regular basis, you are able to track where you are at and possibly catch any reporting mistakes. (These do happen) While in college, take time to manage your credit score, be responsible, and make payments on time and you will be well on your way to adulthood.