Building Credit as a College Student

What is Credit?

As you start making adult purchases, you may find yourself in need of a loan for items you aren’t able to buy outright. The only problem is, how will the lenders know that you’ll pay them back? You guessed it, by checking your credit! To put it simply, a credit score is used to communicate to lenders the likelihood of you paying off your bills. Credit reporting factors in several pieces of credit data when calculating that powerful three-digit number. According to FICO, the credit score used by 90% of lenders, credit scores factor in data from the five following categories:  “payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%).”

Why Start Building Credit Now?

When it comes to establishing credit, it is better to start sooner rather than later. Afterall, 15% of your credit score is based on the length of your credit history. Perhaps you’re in a position where being financially independent isn’t nessacary and you don’t feel the need to start building credit yet. That’s great of course, but consider your needs post-graduation. College uniquely presents a four-year opportunity for establishing positive credit while you still have limited financial responsibility. This allows for you to start borrowing on a small-scale basis that can easily be paid off. Although the transactions may be occasional and small, it can go a long way when establishing credit history.

How do I Start Building Credit?

Many first-timers applying for credit cards are denied for a lack of credit history. That’s right, credit card gatekeeping is a thing. Now, you may be scratching your head wondering, “how do you get credit if you don’t have it?” Oddly enough, you need credit to get credit.  To those who are new to the credit game this is basically like asking, “which came first, the chicken or the egg?” Rest-assured though, there are many approaches that college students can take towards establishing their credit including: getting a co-signer, becoming an authorized user, and applying for a secured credit card.

If you don’t qualify for a loan on your own, an alternative route you can take is getting a co-signer. Usually done by a parent or guardian, consigning essentially utilizes someone else’s good credit as collateral for the loan. This means both you and your co-signer are responsible for managing the account. When treated responsibly, co-signing is an effective method for piggy-backing your way to good credit. However, when recklessly managed you can end up harming both of your credit scores.

Similarly to getting a co-signer, this method utilizes someone else’s good credit as a means to boost your own. Unlike the co-signer method where you start an account of your own, becoming an authorized user simply adds you to someone else’s account. As an authorized user the legal responsibility of the account lies with the primary cardholder not you. So if you’re under the age of 21, this is the easiest way to start building credit.

If you’re looking for a more independent option, applying for a secured credit card may be best for you. This method doesn’t rely on the existing credit of others but instead relies on secured funding (hence the term “secured credit card”). Upon opening a secured line of credit, your lender requires a deposit to act as collateral against your credit limit. Therefore, if you deposit five-hundred dollars your credit limit becomes five-hundred dollars.  As long as you have the account, you will continue to borrow against that same five-hundred dollars. Upon closing the account the initial five-hundred dollars will be returned (assuming you made all of your payments).

How do I Get a Good Credit Score?

The name of the credit score game is good habits. Regardless of the path you choose, it is important that you approach the task of building credit responsibly.

Another important credit factor is utilization. Credit utilization is the ratio between your amount of credit available and your amount of credit used. The typical recommendation is that you keep your utilization under 30%. Therefore, if your credit limit is $1,000 you should keep your utilization under $300.

Payment history accounts for 35% of your overall credit score, making it the largest contributing credit factor. Luckily, nearly every financial institution these days provides some sort of automated payment feature making online payments a breeze. I personally like to pay off my cards every two weeks but it is important to find a method that works best for you.  

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