6 second take: Building credit is important for your financial future, but how can you start when you’re still in college?
When you're a young adult, you hear everyone talking about how important credit will be in your post-college life. It affects your ability to rent an apartment, get a necessary loan, or obtain a mortgage with a low interest rate. But they never teach you how to establish or maintain it, especially in high school.
In many high schools, including my own, there’s no class that teaches you how to build credit and keep it healthy. In fact, roughly 69 percent of college students felt underprepared by their respective high schools to face the financial challenges of real life, according to a Bank of America survey.
While many of us had a late start financially, there are ways you can build credit as a college student.
1. Check Your Credit Report
Even if you’ve never had a credit card or loan before, it’s good to check your credit report as a first step to establishing and building credit. This way, you can make sure that your identity hasn’t been stolen, as well as assess the steps you’ll need to take toward obtaining a high credit score.
Use AnnualCreditReport.com to get free copies of your credit report. You’re entitled to see them once yearly for free. If you haven’t had your identity stolen and you’ve never had a credit card or loan, you likely won’t have much of a credit history. No credit is better than bad credit, so you’re off to a good start.
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2. Get a Credit Card
This is easier said than done, I know. The selection of credit cards can be overwhelming. The instant you start searching for credit cards, you’ll no doubt be inundated with ads as you browse the web.
Good Options for Students
My top pick for college students is the Discover It card for students. It offers great rewards and typically has lower interest rates than competitors’ cards. Plus, it’s easy to get approved, even when you have no credit history. Another option for students with little to no credit history is the Capital One Journey student card
If you don’t have any credit history or a massive income, you’ll likely get accepted with lower limits.
This is good because it keeps your potential damage low while still giving you some room to play with.
Secured Credit Cards
You could also consider a secured credit card. A secured credit card functions similarly to a regular credit card, but requires a deposit prior to usage. This deposit is usually equal to the credit limit for the account. If you put up $200 as a deposit, your credit limit will likely also be $200.
Secured cards are a good option for individuals with little to no credit — like college students — looking to take their first step toward improving their FICO score, a commonly used type of credit score. As such, you’ll want to make sure that the credit company is actively reporting your activity while you use it.
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Catalog Cards
Finally, if you’re having difficulty getting approved, consider signing up for a catalog card. You can only use this credit card at a specific business, such as a retailer or gas station.
“A good way to build credit and easily get approved is by applying for a department store cards, gas cards and debit cards,” says certified financial planner Samuel Rad. “Such cards will give you easier approval, but they will have small credit limits since you are new to the credit world.”
Keep in mind that you should get only one card to start out. This is a mistake that I made: applying for too many at once. Focus on one card for a year or two. It will pay off in leaps and bounds when you get around to applying for higher-tier cards.
3. Use Your Card
This may sound obvious, but once you pick out your perfect card and get approved, use it, within reason. Payment history is the highest weighted factor in all credit scoring models (35 percent). For this, you have to have payments to have a payment history.
An easy way to start a payment history is to automatically charge one or two essentials such as utilities to your card every month.
Then promptly pay the balance off each month. As a result, you’re not spending money you wouldn’t otherwise spend, but you’re still building your credit by establishing a perfect, on-time payment history.
Then, after you’ve used your card for a few months and have established yourself as a responsible credit card holder, see if you can increase your limit.
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“Call the credit card company and ask for a credit limit increase after six months of on-time payments,” Rad says. “You want to regularly ask for these in order to have the highest credit limit possible.”
“Remember credit reporting agencies give high ratings when your usage ratio is low. This means that the higher the credit limit, the lower your credit utilization ratio is,” Rad adds.
As such, keeping your balance low and the amount of credit available high will give you a low utilization ratio, thereby increasing 30 percent of your FICO score. That combined with a solid history of timely payments can jumpstart your credit rating.
4. Lengthen Your Account History
If you keep within your limits and make payments in a timely fashion, you’ll start to build credit slowly, but surely.
However, if you’re looking to speed up your credit score’s meteoric rise, there are still a few strategies you can employ on a short timetable.
First, consider becoming an authorized user on an older credit account.
The length of your credit history amounts to 15 percent of your FICO score, and when you have someone with a longstanding credit line add you to their account, your credit history will “increase” as far as the three credit bureaus are concerned. As a result, your score will jump.
Ask a family member or a friend if they will add you to their account. Of course, you’ll want to ask an individual who is responsible with their card. Otherwise, their bad decision-making could drive your score down, as well.
While you will receive a card from the backing financial institution when added to an account, consider not actually using it. You might even want to leave it with the account owner so you don’t use it by accident.
Doing so will ensure the primary cardholder’s credit prudence is passed on to you in full. Remember that since this person is helping you by putting their credit history at risk, you owe it to both of you to be responsible.
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How to Build Credit as a College Student: The Bottom Line
As long as you maintain your savings and a job while you’re building your credit, you’ll be on your way to financial freedom throughout college and after you graduate. It’ll take a year or two to get there, but as long as you’re not afraid of learning how to do it, you’ll get your score into the “good” range or better in no time.
Additional reporting by Connor Beckett McInerney.
