If you are currently in college, just graduated, or just got accepted into college, then you’re already at a disadvantage because you probably don’t have a credit history. And that’s okay! It’s not a terrible starting point to be at because you haven’t had much of a reason to have a credit score in the first place. It took me until my sophomore year of college before realizing the simple fact that I needed to work on my credit history, like now! It doesn’t matter when you start, but how you start.
Be smart about your credit history, including which credit cards you apply for, how many you apply for, and how you use them. Use these tips below to start building your credit the smart, responsible way.
Why worry about credit?
Your credit history is basically the way that lenders can see how you manage your finances and what kind of risk you are to other lenders. If you don’t have a credit score or have a low score, it puts you at a disadvantage and less likely chance of getting those big-ticket items you seek in the future, such as renting your first apartment or putting down a mortgage on your first home.
Building your credit score will help you do many tasks such as:
- Get a loan for big ticket items such as a new car or new home
- Save you money by lowering interest rates on credit cards or loans
- Tell your future landlord you’re financially responsible to rent an apartment
What goes into your credit score?
The first step of learning how to build your credit history is to understand what your credit score is compiled of, which is not the simplest thing to know. The most common way to calculate your score is using the FICO credit score, but some lenders (credit card companies, loan lenders, etc) may use a different system that will give you a different score. The FICO score is a weighted score, meaning that some components means more than others.
The breakdown of the FICO score is:
- 35 percent payment history
- 30 percent amount owed
- 15 percent length of credit history
- 10 percent new credit
- 10 percent credit mix (types of credit used)
Basically, this means that payment history is the most important out of the bunch and the easiest to manage. Next is to keep the amount owed low compared to the total amount of credit you have. The goal is to keep the amount owned to less than 30% of the total amount of credit. Thirdly, the length of credit history will grow with you through time so nothing you can do to speed that section up.
For the last two, you can have a mix of credit without having 50 credit cards and 200 loan application. Choose wisely with the different credit cards and loans that you’ll be offered, from your favorite stores to pop-up stations around campus.
So with the basics behind us, let’s get down to the nitty-gritty of actually building your credit with some simple tips and tricks to help you with your journey.
Ways to build Credit
Student loans can build or destroy your credit
Since financial aid loans don’t require a credit check, you can get these loans based solely on financial need alone. But the catch is that it does end up affecting your credit history, good or badly depending on you. To avoid the bad consequences of student loan, it’s best to go ahead and start making monthly payments on your balance, right after you graduate.
To avoid making consistent payments, you can set up a payment pay or alternative repayment options with your load lender. It’s better to ask about all of your options before missing a payment that will negatively affect your credit score.
Get a secured credit card
A secured credit card is a great way to build credit without being a loose cannon for future lenders. To get a secured credit card, you put down money in exchange for a credit limit. It can be either the same amount as what you put down or a little bit higher, such as putting down $150 and getting a credit limit of $300.
This is a great option that anyone can get approved for, especially if you get denied for a student credit card (which I’ll explain in a little bit) or your parents won’t let you be an authorized user on their credit cards. It’s low risk and once you’ve been making good decisions with your card for 6 months to a year, you’ll actually get an upgrade to a non-secured card (meaning you get your money back you put down initially).
Become an authorized user
Another great option to build a credit history is to see if your parents will allow you to be an authorized user on their credit cards. Now this is really only a viable option if you parents have good or great credit already otherwise this option will backfire on you. Because what this will do is that their credit history and decisions will be reported as your history to the credit bureaus.
It’s an easy way to build credit without doing much work at all because you already know your parents are going to pay off their debts.
Consider a student credit card
Student credit cards are designed to helps college students with little to no credit history build credit or fix a bad credit history. Even though you may already have student loans, a student credit card is a different kind of credit that is revolving line of credit. As long as you keep your balance low each month and pay it off in a timely manner, you’ll be good to go.
The best way to use a student credit card is to use it for your monthly, recurring bills each month, such as a phone bill or car payment. That way you aren’t using your credit for random things that you want, but for bills. Plus if you pay your balance off quickly, you won’t be subject to paying any late fees or any interests on the amount.
When picking a student credit card, try to get one that has no annual fees and has cash back options. Bonuses are awesome, especially when its cash back on purchases you would’ve already been making. The credit card that I use right now is the Discover Student Credit Card, which allows me to get 1 to 5% cash back at my favorite stores (like Target, Marshalls, HomeGoods, and more). You can applied for the credit card through my link, and if you get approved, you can earn $50 towards a future purchase. Discover is literally giving away free money for new customers! Don’t walk, run!
Pay your bills on time
The most important advice anyone can every give you about building credit is to pay your bills on time! Missing a late payment one or two times can really destroy all of your hard work and take months to repair from.
Your payment history takes up 35% of your score with the FICO scoring system so it does truly mean a lot to future leaders. I like to include all of my bills in my agenda a few days before they are actually due so that way I can make sure to pay them on time. You can also try setting up email reminders, phone alerts, or other ways to remind you to pay your credit card bills on time.
Monitor your credit score regularly
Finally, the other best advice is to manage your credit score regularly. Most credit card companies will actually have their own system of calculating your credit score so that way you can monitor your score at any time. But otherwise you can request your credit score one free time from each of the three credit bureaus. I like to set up mine up that I check one of the credit bureaus at the beginning of the year and the other two throughout the year. But you can do it however you want. You can also check all three of the credit bureaus all at once.
It’s important to monitor your credit history so that way if anyone steals your identity, you can catch it quickly and minimize the damage that is done. Plus if there is a mistake on your credit history (which can happen often), you can fix it quickly before it ruins your credit history in the future.
Resources
Now that you’ve understand the basics of credit score and how to build credit while in college, here are some resources for more information that can future explain credit:
AnnualCreditReporting.com: This is the website that allows you to request a credit report from each of the three credit buraus once a year.
Discover Credit Card: I’ve been using them for over a year, and I love my experience with them. I get cash back bonuses for every purchase I make, which they match during the first year. Plus if you sign up through my link, you’ll get a $50 statement credit just by signing up and getting approved for the card.
NerdWallet: This website is a great resource to find the best credit card for you as well as a bunch of other finance opportunities, such as a mortgage or a loan. They even give you great advice and more tips on being financially smart with your money.
MyFICO: This website is also a great resource that will better explain how your credit history is reported and what you can do to improve your score within the 5 components that they monitor.
You may also like: 5 Creative Ways for College Students to Make Money, 15 Secrets to Saving Money in College, and 7 Simple Tips to Boost Your Self-Confidence
