College opens a world of freedom and possibilities, but it also comes with additional responsibilities (ugh).
Among the responsibilities you should start thinking about is establishing good credit. So of course we’re gonna let you know the best ways to build credit in college (or simply build credit in early adulthood!)
Building your credit profile is an essential step if you’re looking to buy a home, a new set of wheels, and achieve other milestones in life. It can also help save you a lot of money when making big purchases or taking out loans.
Why You Should Start Building Credit Early
As a young adult with limited credit experience, you might be unaware of all the ways that good credit can make your life easier. It’s time to change that.
Now, there are several credit-scoring models. The FICO credit score (the most popular one) ranges from a high of 850 to a low of 300.
Lenders use this powerful three-digit number to decide the credit terms you will get. Or if you will get credit at all. Higher credit scores (670+) are more attractive to them.
But it’s not just loans. Your credit score influences your insurance rates and your ability to get an apartment or even a job.
5 Ways to Build Credit in College
If you don’t have a credit score yet, no need to panic. It might surprise you, but establishing good credit doesn’t take an eternity.
These five tips will guide you through how you can build—and keep— good credit no matter where you are in your credit journey.
Tip #1) Understand the Basics of Credit
First things first: are you familiar with how your credit score is calculated? Understanding how credit works can make a huge difference.
Equifax, Experian and TransUnion (the three major credit reporting bureaus) are responsible for maintaining your credit report. The info in that report is what determines your credit score.
This data is supplied by businesses, creditors and financial institutions where you have accounts.
Your credit report can be a little different from each of the bureaus because some lenders/creditors only report to one or two of the credit bureaus.
The key factors that make up your credit score are:
- Payment history (35 percent)
- Credit utilization (30 percent)
- Length of credit history (15 percent)
- New credit (10 percent)
- Credit mix (10 percent)
Depending on your future behavior, all of the above elements can affect your credit score. Here‘s a more detailed explanation of your credit score, and why your credit score matters.
Tip #2) Get A Low-Limit, Secured Credit Card
They often get a bad rap, but credit cards are a great tool to start building credit. You may have trouble qualifying for certain credit cards if you don’t have a credit history. Lenders need another way to make certain the line of credit they give you will be repaid.
Enter secured credit cards. A secured credit card is the best option to establish a credit history. It gives you an opportunity to make consistent credit card payments.
This type of credit card requires a security deposit or collateral. Your credit line is the cash deposit, which typically lies in the $200-$500 range. Your credit limit won’t go beyond the available balance in your account.
Similar to traditional credit cards, they may have high-interest rates and charge annual fees as well as late fees in case of missed payments.
Many credit card companies, banks, and credit unions offer secured credit cards. Make sure you opt for one that reports to all three of the bureaus.
PRO TIP: Consider a student credit card if you’re a student!
Tip #3) Make Payments on Time
As mentioned, payment history is a vital factor in your credit score, so making timely payments will help you build credit. Keeping current with payments goes beyond your credit card balance.
To establish good credit, you want to make sure that all your bills — student loans, car loans, rent, utility bills, etc. — are paid on time and in full. No exceptions, no excuses.
Missed or late bill payments can take a toll on your score. A good way to make sure you don’t miss a payment is to set up automatic payments.
Tip #4) Keep Your Credit Utilization Ratio Low
Without boring you with a lengthy definition that reminds you of afternoon lectures, credit utilization ratio is the amount you owe compared with your credit limit. It makes up almost a third of your credit score.
Lenders don’t like seeing you use all your available credit. Financial experts vouch for keeping it below 30 percent. If you can, try keeping that figure much lower, say closer to 10-15 percent.
Paying off your credit card balance in full each month will help you avoid paying unnecessary interest and keep your credit utilization down.
Tip #5) Become an Authorized User
Does someone in your family have good credit? Are they down with adding you as an authorized user? If they are, you’re in luck!
By attaching your name to an existing line of credit, the payment activity of the primary cardholder is reflected on the payment history portion of your credit score. You don’t even need a card or have to use their account! It’s a risk free option for them, and could really help you out.
For this to work, ensure that their credit card company reports to credit reporting bureaus for authorized users.
Bonus: Monitor Your Credit Report for Errors
Request your free annual credit report from AnnualCreditReport.com and ensure there are no inaccuracies or signs of identity theft.
If you notice any error, report it to the relevant credit reporting bureau. If you’ve never had credit before, check with each of the three major credit to ensure no open files use your name and Social Security number.
Start Building Credit Today!
Good credit is the cornerstone of spending power and financial freedom. It takes time to build up credit, but can be attained if you adhere to the tips we’ve shared. Get a head start by starting now! Your future self will be grateful.