College is an incredibly exciting time in a person’s life. College students have more independence than they have ever had before yet are not quite out on their own yet. Your college years are filled with controlled chaos and exponential growth: late nights writing papers, making friends that last a lifetime, determining a career path, living away from home for the first time. The transition from childhood to adulthood that happens to college students is truly transformational.
College students need all the help they can get when it comes to preparing for the outside world after graduation. Exiting college with no established credit history can hinder young adults in their financial independence. The best way to combat this possibility is to build credit while still in school with low-risk credit products. There are plenty of ways for college students to build credit while still in school so they can enter the workforce with a good credit score.
How Your Credit Report Works
Your credit report is supposed to give an overall picture of your financial responsibility. It does this by including all the relevant information relating to your creditworthiness. To better understand why building credit as a college student is so important, it is helpful to know how your credit report is compiled and how credit scores are calculated.
The Major Credit Bureaus
There are three different credit reports that can be checked by companies and individuals looking to get a better idea of a consumer’s creditworthiness. These reports are compiled by each of the three major credit bureaus in the United States – Experian, Equifax, and TransUnion. Though they produce three separate reports, the information included on them tends to be generally the same.
Information on Credit Reports
The categories of information contained in your credit report are as follows:
Personally-Identifying Information: These details are included to connect you to your credit report and will typically cover fundamental facts like your full name, your address, your date of birth, your Social Security Number, and employment information.
Credit Accounts: Details of each of your credit accounts including type of account (i.e. installment loan, credit card, online cash advance, student loan), the credit limit or loan amount, the date the account was opened, available credit, and payment history.
Credit Inquiries: Hard inquiries appear on your credit report when you apply for new credit, authorizing the lender or credit card company to check your credit. Too many hard inquiries in a short period of time hurt your credit score. Soft inquiries occur when you are offered pre-approval on credit products or check your own report and do not have any effect on your credit score.
Public Records: Credit bureaus obtain public records from state and county courts that are relevant to your creditworthiness, such as repossessions, foreclosures, and bankruptcies. All of these appear as derogatory marks on your report.
Collection Accounts: When you fail to pay your debts, those debts may be sold to a debt collection agency that will open a collection account in your name. Any and all collection accounts show up as derogatory marks, which can bring your credit score down.
Calculating Credit Scores
The information included on your credit report is then taken and divided up into five categories, each with a different percentage, to calculate your three-digit credit score. The most commonly used credit scoring models are the FICO credit score and VantageScore. Both credit scores are calculated similarly using a model like so:
- Payment History – 35%
- Amount Owed – 30%
- Length of Credit History – 15%
- Credit Mix – 10%
- New Credit – 10%
The three-digit score will be between 300 and 850, the higher the better. You will not have a credit score if you have absolutely no credit history established in your name. Therefore, it is a good idea to have something established before entering the workforce after graduation.
Why Is Building a Credit History Important?
Building credit is incredibly important, and your college years are an excellent time to do it. As you leave school, you will need to be prepared to handle your finances on your own as you enter into your career of choice. Navigating financial obligations and all the other particularities that come along with adult life can be intimidating and overwhelming for young adults. But establishing your own credit history while an undergraduate will put you one step ahead of your peers, making everything else a bit more manageable.
While your credit report is primarily used to determine your eligibility for financial products, that is not the only purpose it serves. You might be surprised to learn that your credit score can also impact where you live, who you work for, and what your insurance premiums look like. If you are looking to move into an apartment after you leave the dorms, the landlord or leasing company will need to see your credit score to approve your application. There is even a possibility that a potential employer may pull a copy of your credit report before hiring you. Building a solid credit history before you even finish your college degree can set you up for success as you enter into the next phase of your life.
How To Build Credit as a College Student
College is a transitional time of life. You are not still a kid, beholden to your parent’s whims but you are not yet an adult, responsible for your own financial well-being. The wisest move you can make during this transitional period in your life is to prepare yourself for everything that comes with the adulthood that lies just around the corner. It may seem like it is still ages away but trust us when we say that your college years go by faster than you realize.
Most college students don’t have much credit history built up. Even those who have taken out student loans may have meager credit, as student loan payments are not required until after graduation. If you wish to get ahead of the game, there are several actions you can take to establish credit while still in school.
Be Added as an Authorized User
A great avenue for establishing credit during your college years is to have a parent or guardian add you as an authorized user to one of their credit card accounts. Once added as an authorized user to a family member’s credit card account, you will have your own credit card to use with access to the primary cardholder’s credit limit.
Authorized users do not need to go through an application process of their own since they have no legal responsibility to pay off the debt themselves, making it the perfect option for college students looking to build credit. If you are considering becoming an authorized user, double-check that the credit card issuer reports authorized users to the credit bureaus as not every issuer does.
Once you have been added as an authorized user, you should see an immediate change in your credit history thanks to the primary cardholder’s credit account on your report.
Get a Student Credit Card
There are several credit card companies that have credit products specifically designed for college students to build credit. Getting a student credit card would allow you to establish a positive credit history while teaching you to maintain good credit habits while you use the card for small daily expenses.
Credit card issuers don’t require a previous credit history to be approved for a student credit card, and some of them offer perks tailored to college life like cash back rewards for good grades. You can look into a few of the most popular student credit cards to see if any of the offers catch your eye.
Use a Co-signer to Get a Regular Credit Card
If a student credit card is not the right fit for you, you can still apply for a traditional credit card. Though you cannot be approved for regular credit cards on your own without any established credit history, you can have a co-signer on your application. Applying for a credit card with a co-signer will enable you to receive approval and start building credit with that card.
Ask a parent or guardian if they would be willing to co-sign and discuss the implications. It is important that you are aware that co-signing onto a loan or credit card means that that person will be legally responsible for the debt if left unpaid. You must practice responsible credit habits by paying off your balance and keeping a low credit utilization rate.
Get a Secured Credit Card
If you are concerned about the temptation of an entire line of credit at your disposal, it is wise to know your limits and weaknesses. Anyone would be tempted to spend more money than they have, and that’s why credit card debt is such an enormous issue in the United States. You can still build credit while avoiding the urge to spend money you don’t have with a secured credit card.
A secured card enables borrowers to be approved for a credit card account with minimal credit history by requiring a security deposit that covers the credit limit. Secured credit cards can be an excellent way to build credit or repair it after a derogatory mark on your report. Making payments on your secured card consistently and on-time will result in establishing a good credit history just as if you were making typical credit card payments.
Maintain a Perfect Payment History
The key to a good credit score is a spotless payment history. Your payment history is worth 35% in the calculation of your credit score. The best way to practice good credit habits throughout your college years is to make every credit card payment on time. It doesn’t matter whether these on-time payments are towards a student card, secured card, or regular card. Every minimum payment you complete by the due date will contribute to establishing a healthy credit history.
We recommend not wracking up a balance too high while you are still in school. You likely are not making that much money while attending classes and you want a healthy debt-to-income ratio. Use your credit card for a couple consistent expenses every month that you are sure you can pay off by the next billing cycle, and then use your debit card for the rest.
Get Credit for Bill Payments
If you live off-campus, you may be able to get credit for bills like utility and rent payments on your credit report. Although these bills are not typically reported to the credit bureaus, there are several new services like Experian Boost and eRentPayment that can report these necessary expenses on your behalf.
Paying your rent and utilities on time could further help you build a solid payment history that establishes a great credit score for you as you exit college. Be very careful to make all these payments by their due date, as you can’t control which payments get reported and which don’t.
Check Your Credit Often
While you are still in school, check your credit regularly to see what progress has been made in building your credit. Thanks to the Fair Credit Reporting Act, every adult has a right to one free annual report from each of the credit bureaus. You can request yours yearly as you go through your college years to see your credit score grow more and more. Performing your own credit check will only result in a soft inquiry instead of a hard inquiry so your high credit score is not harmed.
Once you approach graduation day, you will see the results of all the effort you put into building your credit while still in college. You will be ready to take on the next phase of your life with true financial independence.