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How to build credit as a college student

How to build credit as a college student
September 29, 2020

By Katie Levene & Pam Leibfried

Your credit score is extremely important. It is a financial tool that determines if you get a loan and the interest rate you’ll pay on your loans. It is also looked at by landlords, utility companies, insurers and cell phone companies.

Why? “Future lenders and companies want an indication as to whether or not you’ll make payments,” said Brian Sharapata, Alliant’s senior manager of credit product strategy.  “They want to know how risky it is to get into business with you. A person with a good credit score is seen as less risky because they have a good history of making payments on different types of loans in a responsible way.”

Now, you may be thinking, great but how do I get started? As a college student, you’ve got a lot going on but it’s important to start building credit so that you have opportunities after you graduate. We’ve provided strategies and a complete guide to building good credit while you’re getting your degree.

What is a credit score

A good history of using loans responsibly and making payments on time will help you build credit as a college student. Your credit score is made up of a few key factors: payment history, credit utilization, age of credit, credit types/total accounts and credit inquiries.

Payment history: This category tracks whether or not you’ve paid your bills on time each month. This makes up about 35% of your credit score and is one of the most important score factors.

Credit Utilization: This category makes up 30% of your credit score. It looks at your revolving lines of credit (your credit cards or home equity lines of credit) and if your balance comes close to the amount of credit given to you. For example, if you have a credit card with a $1,000 limit and have $500 of purchases on your card at the end of the month, your credit utilization is 50%. To build credit, experts advise keeping this ratio under 30%.

Age of credit: This category is just as it sounds! It’s how long you have had a loan or credit card, the older the better. It only makes up 15% of your credit score.

Credit types and total accounts: This category looks at all your active and closed accounts over the last 7 years. It looks for a variety of accounts including mortgages, loans (like a car or student loan), and credit cards. Credit types only make up 10% of your credit score, so don’t worry about opening a loan just to add more types of credit to your score. Let this happen naturally.

Credit inquiries: This category only accounts for 10% of your credit score. It looks at how many hard inquiries or “hard pulls” of your credit you have had in the last 24 months. These inquiries typically occur when you apply for a new line of credit, go through a background screening or open up a new utility account, among other instances.

Building credit in college

There are several strategies you can focus on to start building your credit.

  1. Apply for your own credit card
  2. Get a credit card via a co-signer
  3. Become an authorized user on a family member’s card
  4. Make payments on time, every time
  5. Start with small recurring purchases
  6. Don’t apply for too many credit cards
  7. Build credit without a credit card

Apply for your own credit card

If you have a steady income during college, even if your job is only part-time, you may qualify for your own credit card. Here are three of the best credit card options to consider before you apply.

You credit union or bank's credit cards

A good bet to start out is a credit card issued by the bank or credit union where you have your savings and checking accounts. It’s more likely that your application will be approved if the credit card issuer reviewing your application can see proof of your financial stability and responsibility.

If you’ve accumulated savings from your summer job, haven’t bounced checks and deposit your paychecks like clockwork – because again, they can’t, legally, approve your solo application unless you have independent income – they’ll be more inclined to consider you creditworthy.

Store cards

Another option for your first credit card is a store card (Target, Amazon Store Card, etc.). These are called "closed-loop" cards, meaning you can only use them in the store or on the website that issues it. These cards typically have a low spending limit as well. Because store cards can’t be used everywhere the way a Visa® or MasterCard® can, they are less risky for lenders, so you are more likely to be approved for one.

Once you have used the card responsibly and established a credit history, the store will often offer an upgrade to a MasterCard or Visa. In other words, you’ll have an “open-loop” card you can use worldwide.

Secured credit cards

If you can’t get a regular credit card on your own, a secured credit card is a good option. With these cards, you deposit money as the “security” to cover your credit limit. In effect, you are prepaying the bank to give you a credit card.

If you build a solid history of paying on time every month, you’ll establish a credit history that will ultimately make it easier for you to get a regular, unsecured credit card.

If you’re under 21, get a card via a co-signer

If you’re under 21, ready to have your own credit card, but don’t have a steady income that will qualify you on your own, you’ll need a co-signer. For most college students, that person will be a parent, but could also be a grandparent, aunt/uncle, older sibling or another adult who is over 21 and has solid credit.

By co-signing, they are putting themselves on the hook for any balances you accumulate but don’t pay. “Before asking someone to co-sign with you, present your plan for making payments on time,” said Sharapata. “Becoming a co-signer can be risky for the family member. If you don’t make payments or get close to your credit limit, you could impact their credit score too. Take the time to show that you are responsible and will respect the hard work they’ve put into their credit score.”

If you don’t have a credit history, become an authorized user

A great way to establish a credit history is to have your parents add you as an authorized user on one of their credit card accounts. As an authorized user, you can effectively “piggyback” on your parents’ credit history, giving your own credit history a jump-start.

Once you have this bit of inherited credit history, it’s more likely that you’ll be approved for your own credit card (provided you also have some income). This tactic will only benefit you if your parents have solid credit themselves. If their credit history is spotty or if they are late with a payment on the card, it could negatively impact your credit.

If your parents are willing to make you an authorized user, be sure that you discuss in advance what their expectations are. Some parents hope their “piggyback” boost will qualify you for your own card, but they don’t want you to use theirs. Some want you to use their card only for books or school fees. Some want the card used for emergencies only; if so, be sure that you and your parents are on the same page of what qualifies as an emergency.

Pay on time, every time 

The most important factor in your credit score is paying your bills on time, and this is even more critical with credit cards. If you don’t pay your credit card bill responsibly, the credit card company won’t raise your credit limit or offer you a better card.

Plus, it’s less likely that you’ll be approved for any other credit cards. Set up automatic payments or a reminder of your bill due dates on your calendar and pay on time, every month. It’s best to pay your entire balance, but at a minimum, you MUST pay the minimum payment amount or you’ll really wreck your credit.

Start with small recurring purchases

Simply having the card in your wallet doesn’t do your credit score all that much good. “To build a solid credit history, you need to use the card for purchases, then pay it off on time, every time. A great start might be a small, recurring expense like a health club fee or Netflix account,” said Sharapata.

We recommend small purchases because you never want to come close to maxing out your credit card. Why? As mentioned above, the second biggest factor in your credit score is your credit utilization. You want to keep your balance low on your card and a small monthly expense will help you do that.

Pro tip: If you need to charge a car repair or other big expense on your card, just pay the balance down as quickly as you can so you can get your credit utilization back down. 

Don’t apply for too many credit cards

Don’t fall into the trap of immediately applying for more credit cards after you’ve gotten that first card and started to establish your credit history. If you apply for too many cards or loans too quickly, you’ll be seen as a high credit risk.

Be patient while you watch your credit score improve. If you’re managing your money so effectively that you are not carrying a balance on your credit card, consider applying for a rewards card that will give you points for your purchases.

Build credit without a credit card

Your credit report is about more than just your credit card history. Utilities, cable companies, internet providers and other companies often report payment history to credit bureaus, so you must pay your bills on time every month.

We can’t say it enough, the biggest factor in determining credit scores is your payment history. If you are paying your bills on time each month, your credit score will be healthy and will help you the next time you need to get a loan.

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Katie Levene is a marketer fascinated with finance. Whether the topic is about the psychology of money, investment strategies or simply how to spend better, Katie enjoys diving in and sharing all the details with family, friends and Money Mentor readers. Money management needs to be simplified and Katie hopes she accomplishes that for our readers. The saying goes, "Knowledge is Power", and she hopes you feel empowered after reading Money Mentor.

Pam Leibfried is a marketing content specialist whose love of words led to a writing and editing career. After a brief stint teaching English, she transitioned to corporate communications and spent 20 years at The Nielsen Company before joining Alliant’s content development team. Early in her work life, Pam’s friend Matt explained the benefits of a 401(k) and her dad encouraged her to start a Roth IRA. Their good counsel prompted her to prioritize retirement savings, which just might enable her to retire early so she can read more and live out the slogan on her fave T-shirt:  “I have a retirement plan: I plan on quilting.”  

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