The Right Way to Build Credit as a College Student
Building good credit in college is one of the best financial moves students can make. Having good credit allows them to qualify for loans, rental applications, auto insurance, phone plans and can help them get a job.
Improving a credit score can be a Catch-22: Your score won’t go up until you have a good score.
Being responsible with credit is the best way to establish and improve a credit score. For college students without much credit history, there are small but important steps they can take to show how responsible they are with credit. And, they can be done without going into debt.
Here are some ways to be responsible with credit as a college student and start building a credit score:
Store credit card
An easy way to get a credit card is through a store. Department stores such as Kohl’s and Nordstrom often offer them to customers at the checkout line.
The big caveat — and this is true with all credit cards — is to pay the bill in full on time each month. Retail credit cards have higher interest rates than regular credit cards, so you could be bigger debt with a retail card if you don’t pay on time than you would with another card.
The upside is that retail cards can only be used at the issuing retailer, so you can’t use it to pay for a vacation.
Secured credit card
If you want to avoid the enticement of a store credit card, go to your bank and get a secured credit card. For people with poor credit history or no credit, such as college students, a secured credit card can provide the financial security that they won’t spend more than they can afford.
A secured credit card requires a deposit, such as $500, that is the user’s credit limit. If a credit card payment isn’t made, the card issuer pulls money from the deposit.
To get the most out of it, cardholders should use as little of the available credit as they can. This will leave them with a low credit utilization rate, which can improve their credit score. The best thing they can do is not miss any payments, since late or missed payments have the biggest impact on a credit score.
The credit reporting agencies will look at a secured credit card with the same criteria as an unsecured card. These include when the card was opened, the credit limit, balance and payment history. The benefit is that a secured credit card should be easier to qualify for so that a consumer can build their credit.
Just like unsecured credit cards, secured cards can have annual fees. Eventually, holders of secured credit cards should see their credit score improve enough so that they qualify for an unsecured credit card with a higher credit limit.
Student credit card
Some credit cards are marketed to students and others who don’t have much borrowing history. Federal laws restrict issuing credit cards to anyone under 21 unless the applicant has the independent ability to repay debt or has an adult co-signer who accepts joint liability for the account.
Student credit cards may have low credit limits, such as $1,000. Otherwise, they may be indistinguishable from other credit cards and may have features such as cash back, no annual fee and budget management tools.
Regular credit card
If you can qualify, a regular credit card should be your next step in achieving credit and using it well. A regular credit card will have a higher credit limit than any of the cards above, and can offer better rewards programs.
It’s important to do some research first. Look for a card that has a low interest rate, no annual fees, good credit limits and clear billing policies.
If you expect to carry a balance, get a no-frills, low interest credit card. Reward credit cards often have higher interest rates and annual fees that can offset some of the rewards.
How to best use any credit card as a student
After getting any of the above credit cards, start using it with baby steps. Use it for occasional, small purchases that you can pay for on time. This will help build your credit history and help keep you out of debt.
Don’t let a new card sit in your wallet. Use it or the bank may close it due to inactivity. Put small, recurring charges on it, such as a Netflix account or other website subscriptions you regularly use.
Don’t make any big purchases unless it’s an emergency. Having low debt levels on your credit card will allow you to have enough of a credit line available in an emergency, and will increase the credit utilization part of your credit score.
This should go without saying, but pay off your credit card balance each month and only buy what you can afford. Also, pay all of your other bills on time. Rental and utility payments that aren’t paid on time may be listed on a credit report. Even an unpaid traffic ticket could come back to haunt you.
Lastly, don’t apply for several credit cards at the same time, especially if you’ve just started establishing credit. This can be a sign that you’re desperate for money and can lower your credit score. One credit card should be enough for college students, and should make it easier to keep a handle on debt.
Building credit with student loans
One of the last things you want to do as a college student or graduate to hurt your credit score is to default on your student loans.
Make at least the minimum payment each month and do it on time. Borrow only for what you need to go to school, such as tuition, and not to buy a car or dine out. Once you graduate, you may want to consolidate your student loans to get a better interest rate.
On-time payments and paying off your student loans will improve your credit score over time. If you run into problems making payments, contact your student loan provider and ask for forbearance. Federal student loans also offer Income-Driven Repayment plans, or IDR, that base payments on a borrower’s income.
When contacting a student loan servicer, do it in writing so there’s a paper trail that may help solve problems later. Some lenders provide a slight interest rate reduction for student loans set up to be paid through automatic payments.