It is extremely important to begin building credit as a student. Your credit score is very valuable, dictating what loan and credit card terms you can get, the insurance premiums you pay, your ability to rent an apartment or lease a car and – perhaps most importantly – your eligibility for certain jobs, particularly those requiring a security clearance or entailing monetary responsibility. And, the best part is, everyone starts with a clean slate.
That’s actually a double-edged sword in that only two paths exist from your starting point: up and down. You don’t want to take the latter route, as it would take you into bad credit territory and leave you facing an even steeper climb in your already uphill quest for financial success. Starting your credit career on the right foot, on the other hand, puts you in position to save hundreds (or even thousands) of dollars after graduation.
8 Ways Students Can Build Credit
The basic premise of credit building is that one must establish a track record of responsible use and repayment of borrowed funds. Credit cards and loans are the most accessible mechanisms for creating such a track record, as young people can get approved for them and they report account information to the major credit bureaus each month. This information is noted in your major credit reports, which then serve as the basis for your credit scores.
The table below will provide a more detailed look at the different ways young people can improve their credit and generally start their financial lives on the right foot. We also explain the timeline for when each component should be employed, detail which options require you to incur debt andhighlight the best tools of the trade to support your efforts.
|Method / Factor||Overview||Timeline||Requires You to Get Into Debt?||What to Use|
|Authorized User||Getting your name added to a parent’s credit card account will provide modest credit building benefits, possibly enabling you to get one of the best student credit cards.||High School||No||Have your parents consider one of the the WalletHub Editor’s Best Credit Cards|
|Secured Credit Card||Secured cards offer basically guaranteed approval and make it impossible to overspend.||Freshman & Sophomore Years||No||Place a deposit on one of the WalletHub Editor’s Best Secured Credit Cards|
|Student Credit Card||Student credit cards do not require a refundable security deposit and often offer 0% intro rates and/or rewards.||Junior & Senior Years||No||Apply for one of WalletHub’s Editor’s Best Credit Cards for College Students|
|Store Credit Card||Store credit cards are unsecured and tied to a particular retailer. They represent an easy way for students to get an additional credit line reporting to the major bureaus each month.||Senior Year||No||Open the store credit card from your favorite retailer|
|Student Loan||Like other loans, monthly student loan payments are recorded by the major credit bureaus, thus affecting your credit scores.||College / Grad School||Yes||Federal Student Loan|
|Auto Loan||Auto lenders report monthly account information to the major credit bureaus.||18+ but it’s best to hold off on a car purchase as long as possible as it is a significant expense.||Yes||The best student auto loan you can qualify for and an affordable used car.|
|Mortgage||It’s rare that a college student will have a mortgage, but you can begin preparing for homeownership by laying the groundwork for a solid credit score.||30+||Yes||An affordable mortgage and home.|
With all of the above in mind, it’s important not to forget that credit history is only one part of establishing a healthy financial lifestyle. Your disposable income matters as well, as you don’t want to overextend yourself and lenders must see that you have enough money to comfortably afford the minimum payments on a new account. Besides, as a college student, maximizing your earning power should already be on your mind.
What is a Good Credit Score for a Student?
Your goal should be to graduate from college with a credit score in the 680-720 range. This would give you “good credit,” and we’ve already mentioned how that status can save you a great deal of money on things like insurance premiums, auto loans and your eventual mortgage on a home.
In order to meet such lofty aspirations, you’ll need to open your own credit card as a freshman, use it impeccably and perhaps even supplement your available credit – thereby reducing your overall credit utilization – by opening a store credit card closer to graduation.
Making sure you avoid the following pitfalls of student credit building is an absolute necessity, of course.
Student Credit Building Mistakes to Avoid
College students make mistakes with credit cards. That’s the common narrative, and there must be some truth to it or else parents wouldn’t be quite so apprehensive about their kids and plastic. But mistakes can be avoided, and the following tips will help you stay on the straight and narrow.
- Overapplying: Applying for too many credit cards in a short period of time is bad for your credit standing and will hamper your efforts to open a good account, as such behavior indicates a troublesome urgency for additional spending power. So, if you don’t get approved for a student credit card after submitting a couple of applications, play it safe and place a deposit on a secured credit card.
- Getting Too Many Credit Cards: It’s best to keep things simple early in your credit career. So while you may be tempted to open a number of cards to cobble together enough spending power or to earn sign-up bonuses, avoid the urge until you’ve built enough credit to qualify for truly valuable terms.
- Maxing Out Your Cards: Credit utilization – how much of your available credit you spend – is an important component of the Amounts Owed portion of your credit score, which itself comprises 30% of your overall score. It’s best for your credit if you keep utilization around 40%.
- Missing Due Dates: Always, always pay your bills on time. While you’ll need to pay the full amount due to avoid interest, you only need to pay the monthly minimum (usually around $15 for student cards) to stay current on your bill and thus continue building your credit.
- Ignoring Monthly Bills and Credit Reports: Make it a habit to review your monthly account statements as well as pull one of your major credit reports every four months. The former will help you stop overspending before it gets too bad. The latter will help you identify costly errors in your credit reports, and both will help you catch fraud as quickly as possible.