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Establishing credit in college can give you a leg up come graduation. If you want to rent an apartment or buy a car, chances are the landlord or lender will run a credit check. They want to make sure that you seem reliable and that you'll likely be a low-risk tenant or borrower.
By building your credit history while you're still in college, you can increase your chances of getting approved for rentals, loans and credit cards on your own, without needing a parent or guardian as a cosigner.
There are several ways you can get started, including getting a credit card or special loan designed for people who need to establish credit. Here's how to do it.
Get a Secured or Student Credit Card
A secured credit card can be a great option if you don't yet have a credit history and don't qualify for an unsecured credit card. The biggest difference between the two is that with a secured card, you have to put down a security deposit to guarantee your credit line.
Oftentimes, your credit line will be the same amount as the deposit—so if your deposit is $250, that's how much you can spend. Once you've established a history of on-time payments, the bank or card issuer may give you the option to switch to an unsecured credit card, meaning one that doesn't require a deposit. In that case, you'll get your deposit back and have a standard credit account. The better your credit gets, the more likely you are to qualify for unsecured credit cards based on your credit score and history.
The benefit of a secured card is that it's easy to get even if you have little to no credit history—or a "thin file" in credit-speak. Even better for building credit history, the issuer will likely report your account activity to the three main credit bureaus (Experian, Equifax and TransUnion), just as they do with unsecured credit cards. Just be sure to check any secured cards you're considering to find out whether they do report to all three bureaus (some may report to just one or two). That's how you build credit history, so it's important to pay your bills on time and avoid maxing out your credit line. On-time payments and low credit usage are two of the biggest factors that go into calculating your credit score.
If you're 18 or older, enrolled at a college or university, and earn an income (even from a part-time job), you may qualify for an unsecured student credit card. You're likely to get a lower credit limit with a student card than with a standard credit card, usually $1,000 or less. But that can actually be a good thing. Lower credit limits mean less risk for lenders, and less risk means they can be more flexible in their approval criteria. Another perk of student credit cards is that they sometimes include bonuses such as discounts on school-related expenses and even cash back rewards.
Join a Credit Card Account as an Authorized User
You can also build credit by asking your parents or a loved one to add you as an authorized user to one of their credit card accounts. Becoming an authorized user doesn't require a credit check, so that's one hurdle removed.
The primary cardholder's credit line and payment history will show up on your credit report when you become an authorized user, so this can be a great way to bulk up your credit profile. Ideally, they'll add you to an account that has been open for several years and which has a high credit limit or a low balance.
Becoming an authorized user will only help you if the primary user's account is in good standing and you know that they're able to make their payments every month. If your parents sometimes miss their due dates, being added to their credit card could hurt your credit score.
Keep in mind that if you do ask to be added to an account and are given a credit card, your parents or other loved one will be able to see everything you buy and how much you're spending. You may want to discuss any ground rules or expectations they have about how you'll use the card before they add you. That will help you avoid conflict when the bills start coming.
Get a Credit-Builder Loan
A credit-builder loan not only helps you, well, build credit, but it also helps you establish savings. When you take out a credit-builder loan, you don't receive any money right away, the way you would with a traditional loan. Instead, a lender sets aside the loan amount—usually between $300 and $1,000—in a savings account. You pay monthly installments toward that amount until your "repayments" match the number in the savings account. Then you can withdraw the money, which can be really helpful for buying books, putting a security deposit on an apartment or saving a down payment for a new car.
The best part is, your lender will report your monthly payments to the three credit bureaus, so you can establish a good credit history while saving money. You will need to show proof of income to qualify for a credit-builder loan, so if you don't have a job, you may need to become an authorized user on an account or take out a secured credit card instead.
The key to making a credit-builder loan work for you is to request an amount that has manageable monthly installments. So, if you have a part-time job and only work a few hours a week, you may want to request $300. With a 12-month repayment period, you'll only owe $25 a month, which is fairly manageable. If you ask for a $1,000 loan, your payments will work out to about $83 a month—a pretty big jump.
Different lenders offer varying repayment periods, but your goal with a credit-builder loan is to establish a history of on-time payments, so don't overburden yourself. Once you've reached a good credit score (aim for 670 or higher), you can qualify for credit cards and loans with higher limits.
Practice Good Credit Habits
Although building credit in college will open financial doors for you post-graduation, it has another benefit as well. It helps you establish good credit and money management habits, which are crucial to your financial health.
Here's what to do:
- Pay bills on time. Making on-time payments has a huge impact on your credit score and is one of the top factors in whether lenders will work with you. Even if you can only make your minimum payments each month, be sure to submit them by the due date. Better still, set up autopay on your accounts so you never have to worry about missing a payment or owing late fees.
- Create a budget. Make a list of your monthly expenses and compare it to your income. If you spend more than you earn, look for ways to trim your expenses so you can always make your credit card or loan payments. In the best-case scenario, you'll pay off your entire balance each month so you don't accrue interest—but at least factor your minimum payments into the budget.
If you're charging items such as groceries and gas, factor those expenses into your budget and use the money you've set aside for those to pay off your cards every month. Avoid the trap of charging items and only paying your minimums without knowing how much interest you're paying and how your balances are increasing.
- Don't charge too many expenses. It can be tempting to put all of your expenses—books, groceries, phone bill and the like—on a credit card, especially if you earn rewards or cash back bonuses. But the more you charge, the higher your balance runs, making it more difficult to pay it down each month. High balances also raise your credit utilization ratio (how much of your credit you're using compared to your credit limits), which lowers your credit score.
- Only apply for credit when you need it. Every time you apply for a credit card or loan, lenders will run a "hard" credit check, also known as a hard pull. These pulls appear on your credit report and may temporarily lower your score slightly. If lenders see too many pulls, they might think you're a high-risk borrower and deny your credit card or loan application.
Limiting the number of accounts you have also keeps your own spending in check. When you're focused on just one or two cards or loans, you can avoid having several balances and paying high interest.
- Ask for help. Budgeting and managing your money can be challenging when you're first starting out, so don't be afraid to ask for help. Your parents may be able to weigh in on your budget and offer some tips for trimming your spending. There are also lots of blogs, digital resources and online communities around budgeting and personal finance that can provide answers and guidance.
Keep Track of Your Credit
Once you open a credit card or loan account, you'll need to start the lifelong process of tracking your credit. This is easier than it sounds. You're entitled to a free credit report every year from each of the three credit bureaus, which you can order at AnnualCreditReport.com (you can get a report every week through April 2021). Review the reports to make sure you recognize all of the accounts that appear under your name, and double-check that there are no inaccuracies in your payment history. If you notice any false information, you should contact whichever bureau issued the report right away.
You'll want to keep an eye on your credit score throughout the year as well. A sudden drop in your score could indicate identity theft, missed payments or other issues. Experian offers a free credit monitoring service that will monitor your score and send you an alert when it changes, help you dispute fraudulent activity and recommend ways to increase your score.
Tracking your credit helps you boost your financial profile and prevent identity theft. Most important, it gives you control as you prove yourself to be a trustworthy borrower.
Building Toward Your Future
The decisions you make in college set the foundation for your post-graduation life, especially when it comes to your finances. Can you start building credit after you graduate? Of course. But you'll thank yourself if you've already established a good credit history and solid credit habits, because the transition will be that much easier. If you're ready to get started, sign up for Experian's free CreditMatch™ service to find the right credit card for you.