How to Build Credit as a College Student or Young Adult

Whether you’re going to college this fall or just graduated and getting started in the workforce, it’s not too early to build a solid credit history. Your credit score based on this story carries a lot of weight when it comes to some of life’s greatest milestones. Starting now will help ensure that in due time you will be on the right side of the equation. Here are some ways you can earn and maintain a high credit score.

The central theses

• As a student or young adult, you can qualify for a student credit card or secured credit card that will help you build a credit history.
• A good credit rating could lead to better interest rates, cheaper repayment options or a larger loan in the coming years.
• Remember to pay on time and keep your loan usage low. Otherwise, your credit score will go down.

What is a Credit Score?

Financial institutions like banks and credit card companies are inherently risk averse. Whether you’re borrowing to buy a home or leasing a car with a car dealer, lenders want to know they can trust you to make your payments on time. Originally developed by Fair Isaac Corporation (FICO) in 1989, a credit score attempts to do this by assigning a single, three-digit number to your overall creditworthiness.

Your creditworthiness is based on information provided by lenders to the major credit reporting agencies and compiled in your credit reports. Values ​​usually range from 300 to 850, and the higher the better.

Several factors play a role in your creditworthiness, including how much debt you have, how many loans and credit cards you have outstanding, and how much of your credit limit you are currently using. Some types of information, e.g. B. How many late payments you made are more important than others. Although credit bureaus vary slightly in how they categorize their scores, one of the top three, Experian says that good credit starts at 670.

If you can build and maintain good credit, you can enjoy numerous financial benefits, including generally lower interest rates when you borrow, access to a wider variety of credit cards, better chances of getting approved for various loans, and higher credit limits. Your creditworthiness can also affect the price you pay for insurance, whether a landlord lets you rent a place, and even whether an employer offers you a job.

Steps to Building Your Credit Score

As a college student or young adult, building your credit score isn’t difficult. These are some of the steps that can put you on the right track.

• Check your credit history. If you’ve never had a loan before, the credit bureaus may have little or no information about you. Even so, you should request a credit report from any of the three major credit reporting agencies (Equifax, Experian, and TransUnion). It is possible that someone stole your identity and opened accounts on your behalf. According to Javelin Strategy & Research’s 2018 Child Identity Fraud Study, more than a million children were affected by identity fraud in 2017. By checking your credit report early on, you can make sure you have a clean slate, and if not, you can dispute any discrepancies that have been found. You can obtain free copies of your credit reports from the official AnnualCreditReport.com website for this purpose.
• Open a student credit card. There are tons of credit cards out there, but some banks issue student credit cards. Although they come with a low credit limit and higher annual percentage rate (APR) than your typical credit card, they don’t require an established credit history. In addition, some offer student-related discounts.
• Or apply for a secured credit card. If a student credit card isn’t enough, or you don’t qualify for one reason or another, you may be able to get a secure credit card. These cards pose a low risk to the lender as they require you to put money on deposit as collateral. If you use your secured card, your payments will be reported to the credit reporting agencies so that you can have proof of on-time payment. After a while, you should be able to switch to a traditional, unsecured credit card.
• Make your payments on time. How reliable you are with paying your bills – including credit cards, student loans, and other debts – is one of the most important factors in determining your creditworthiness. Once you start using credits, the best thing to do is to make sure you don’t miss any payment as doing so, especially repeatedly, can affect your score. Conversely, executing all payments on time can increase your score. If you’re fond of forgetting, consider setting up automatic payments through your bank account. That makes it almost impossible to miss a payment.
• Keep your loan usage low. Having plenty of credit available at any given time can be a good thing. It shows your purchasing power, as well as your ability to keep balances low or cash out in full – both great signs for any lender. A determining factor in your creditworthiness is your credit utilization, which is the amount of credit you are using at any given point in time compared to the amount of credit available to you. The lower your workload, the better.

Debit cards won’t help you keep a credit history as they don’t report your account activity to the credit bureaus.

Common mistakes to avoid

For some people, having access to credit makes it all too easy to spend too much and get into financial trouble. Here are some of the pitfalls to watch out for:

• Go overboard. Even if you qualify for multiple credit cards, having too many of them can complicate your financial life too much. Additionally, every time you apply for a card, the lender does a hard query on your credit history, which negatively affects your credit score.
• Maximize Your Credit. By refraining from spending the entire credit limit on your credit card (or cards), you are helping to keep your credit usage down.
• A payment is missing. Missed and late payments are a black mark on your credit history and can damage your creditworthiness for years. They can also lead to penalties.
• Close accounts early. If you no longer use a particular credit card, you may want to keep that account open anyway. For one thing, closing the account will do nothing to prevent interest accruing or to make the outstanding balance disappear; the credit card company continues to expect a repayment; It will report your late payments to the credit bureaus and eventually hand your account over to a debt collection agency – all of which will have a huge impact on your creditworthiness. Even if your balance is fully paid, experts recommend keeping the account open to increase your credit utilization.

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