As a student, knowing your credit score probably isn't too high up on your list of present priorities – maybe somewhere after looking up your GPA and your current dining hall balance – but it should be.
Your credit can affect everything from your eligibility to rent an apartment to your ability to qualify for a loan to how much that loan will cost you. So unless you want to bunk up with mom and dad post grad, consider spending some time getting acquainted with how to build credit.
What is a credit score anyway? A number between 300-850 that tells creditors how risky it is to lend money to you.
The Importance of a Good Credit Score
If you plan on buying a car or a house in the years after graduation, having a good credit score can save you thousands of dollars.
Unfortunately, according to a 2013 study by the American Banker's Association, only 42 percent of Americans know their credit score.
The good news is, you have plenty of time to build credit in college, and the earlier you start, the better off you'll be by the time you graduate.
Tips on How to Build Credit While Still in School
Credit Score Basics
Before we discuss tips on how to improve your score, you should know what a "good score" is. There are different types of scores, but the common one most lenders use is a FICO score.
- Excellent credit: 750 and above
- Good: 700-749
- Fair: 650-699
- Poor: 600-649
- Bad: under 600
These are general rules of thumb. Every lender has its own preferences. Try to aim for a score of 700 or above.
Student Credit Cards
Credit cards are arguably ones of the easiest ways to build credit. Before signing up for the next credit offer that comes across your inbox though, start by building a solid understanding of how credit cards work.
Mastering money management basics first is highly recommended. You should always be able to pay off your balance on time and in full each month.
Where to Apply for a Credit Card
The Credit CARD Act of 2009 made it so that those under 21 need to show that they have the ability to pay a balance or have a cosigner to be approved.
If you can prove a steady stream of income, student credit cards can provide a great introduction to credit – helping you build your credit history with campus-friendly fine print and policies.
Don't have a stable job or can't get your parents to cosign? There are other alternatives.
- Your Bank. Having an existing relationship with a bank can help boost your chances of being approved for a credit card. Try applying for a card with your bank first.
- Credit Union. Is there a local credit union you can join? Credit unions tend to offer better interest rates and are often more consumer-friendly than big banks. Building a relationship with one now can save you in the future.
- Retail Stores. Your favorite store likely offers their own credit card, and it may come with some savings perks. These can be easier to qualify for, but they have higher interest rates. Be sure to never charge more than you can handle paying for.
- Parents. Your parents can add you as an authorized user to their credit card if you can't sign up for one yourself. This means you're not responsible for paying the bill, but you can use the card and benefit from their credit score and usage.
However, the negatives of how they use the card is taken into consideration as well. If your parents have missed payments or don't have good credit scores, you might not want to take this route.
Pay Your Bills on Time
You can still build credit without a credit card as long as you're paying bills. If you're making payments toward the following, your credit can be impacted:
- A car
- A phone
- Medical debt
- Parking tickets, speeding tickets, library late fees, etc.
That's why you should always pay your bills on time, no matter where they come from. Always be a responsible consumer. That's what lenders will be looking for when considering you for a loan.
Avoid These Mistakes to Keep Your Credit Intact
When you're working hard to improve your credit score, the last thing you need is to make a wrong move and have it drop by several points. Avoid making the following mistakes that can negatively affect your score.
Becoming a Cosigner
If you cosign a loan for a friend or family member, that means you'll be responsible for the loan in the event they can't pay. As your name is also on the loan, their missed payment will reflect poorly on you.
Applying for New Credit Often
Any time you apply for credit, a "hard inquiry" is made by the lender. This can hurt your credit score depending on how many inquiries occur.
Take it easy when applying for credit. Try to stick with one credit card throughout college.
Never Checking In
You won't know if you're building credit without checking your score. You should use www.annualcreditreport.com to review your credit history to make sure it's accurate. You're entitled to one free report per year from each of the three credit bureaus.
This one might be obvious, but your debt-to-income ratio has a lot of bearing on your score. If you're earning $1,000 per month and have a credit card balance of $3,000, that doesn't indicate responsible usage.
Only charge items you've planned for or buy regularly. Don't use a credit card to finance purchases like the newest Apple product or a new wardrobe. If you can't afford it without a credit card, then don't buy it.
Excellent Credit Isn't Hard to Get
Even if your score is in the 600s right now, you still have a few years to catch up and make an improvement. While you won't see an immediate increase after taking action, you should see a steady improvement over the next year.
Forming these good financial habits in college will greatly benefit you once you graduate into the "real world." Employers, landlords, and creditors will all be looking at your score, and you won't have to worry.