Graduation may seem like a distant event, but it will be here before you know it. Having good credit will help you after school when you’re working and living on your own, but building a solid credit history can be difficult as a student. According to Experian, the average credit score of those 18 to 25 was 679, the low end of the “good” range. But 26 million Americans — approximately one in 10 — are credit invisible, meaning they don’t have enough of a credit record to generate a credit score. With poor credit or no credit history at all, it can be difficult to qualify for an apartment, car loan, or even a cell phone. Luckily, there are strategies you can use to establish your credit history right now. If you’re researching how to build credit as a college student, these seven tips can help you get started.
How to Build Credit as a College Student
1) Become an Authorized User
Becoming an authorized user is one of the quickest and easiest ways to build credit as a college student. With this approach, someone with good credit — such as a parent or relative — adds you as an authorized user to their account. Authorized users have permission to make charges to the account, and the primary cardholder is responsible for any charges they make. When you become an authorized user, your loved one’s account information will show up on your credit report. If they have had the card open for several years and used it responsibly, it could improve your credit. You can benefit from being an authorized user even if the primary cardholder doesn’t give you a card or allow you to make charges. But if you do get a card and have charging privileges, make sure you both clearly discuss what you are allowed to spend, who is responsible for paying for those charges, and when the payments are due.
2) Start With a Student Credit Card
If you’re wondering how to build credit as a college student, student credit cards can be a valuable solution. Student credit cards are typically easier to qualify for than traditional credit cards since they’re specifically designed for young adults. Some student cards even offer extra benefits, such as points or cash back on purchases and cash bonuses when you graduate. If you get a student credit card and use it while in school and make all of your payments on time, you can establish your credit. After graduation, you may be able to transition to a traditional credit card with a higher credit limit or a stronger rewards program.
3) Open a Secured Credit Card
If you have no credit history or have poor credit, a secured credit card can be a useful tool. With a secured card, you make a deposit — such as $250 — and the deposit acts as your spending limit. As you use the card and make payments, you can establish good credit habits and improve your credit record. Over time, you can better your credit score and eventually qualify for other forms of credit.
4) Don’t Apply for Too Much Credit
Although it’s a good idea to shop around before taking out a loan or applying for a new credit card, you should limit how many credit inquiries you submit. Each hard credit inquiry can cause your score to drop by several points, and hard credit checks stay on your credit report for two years. Having too many inquiries can make lenders nervous since they may think you’re overextending yourself and are at risk of being unable to afford your payments, so limit hard credit checks to when you are serious about taking out a loan.
5) Always Repay on Time
The FICO credit score is one of the most commonly used scores. FICO uses several factors to determine your credit, but your payment history plays the biggest role in calculating your score. Your payment history — whether you have made all of your payments on time or have been late in the past — affects about 35% of your credit score. To maintain and build your credit, set up calendar reminders to ensure you never miss a due date and, when possible, sign up for automatic payments.
6) Monitor Your Credit Utilization
Your credit utilization is how much of your available credit on your revolving accounts — such as your credit cards — that you use. For example, if you have a credit card with a $1,000 credit limit and your balance is $500, your credit utilization rate is 50%: you’re using half of your available credit. Credit utilization is a major factor used in determining your credit score. According to FICO, the lower your credit utilization is, the better, and maintaining a credit utilization rate of 10% or lower while making all of your payments on time can positively impact your credit. To improve your credit utilization, pay down your credit card balances. If you already pay off your balance in full every month, you can also lower your credit utilization by contacting your credit card provider and asking for a credit limit increase.
7) Pay Down Student Loans
Your student loans, including federal or private loans, can affect your credit. For example, your score may drop if you apply for new loans and undergo a hard credit check, or your score can be significantly damaged if you miss a payment. Paying down your student loan balance — even when you’re in school — will help you build a positive payment history. If you pay off your loans early, you can free up cash to pay down other debt, such as your credit card balances, and save money over time.
Practice Healthy Credit Habits While in College — and Beyond
The benefits of a good credit score can’t be overstated; your score has a significant impact on your life. Building credit in your 20s or teens can set you up for success later on. Key tips to remember include:
- Making your payments on time is essential to build and maintain a strong credit score.
- Limit credit applications to when you really need a new loan or credit card.
- Keep your balances low to avoid paying interest and to lower your credit utilization rate.
- Check your credit reports for free at AnnualCreditReport.com to find out what information about you has been reported.
Now that you know how to build credit as a college student, you can focus on managing your credit card payments and improving your finances. Learn More: What credit score is needed to refinance student loans?
