Between classes, extracurriculars, and social activities, most college students have no trouble staying busy. Building credit may be low on their list of priorities, but that doesn’t mean it’s too early to start thinking about it. Being mindful of credit as a young adult can make it easier to land a car and a place to live, and secure lower interest rates on loans. Here are some steps that will set you on the path to stellar credit for the times when you need it most.
1. Know your credit score.
The first step to building excellent credit is learning your credit score. Even without car payments or credit cards to pay off, anyone with student loans will have a credit history. A federal law makes it easy to check credit reports from the three main reporting agencies online. Annual reports are free, but according to a recent survey only half of college students take advantage of them. Having an idea of your credit score isn’t the only reason to check it: The report may contain mistakes or traces of fraud you weren’t aware of. Staying on top of your credit status means you can take care of any complications before they become an issue.
If you haven’t been checking your report because you’re afraid doing so will lower your score, fear not: When you check your score yourself, you’re initiating what’s called a “soft” credit inquiry. These kinds of inquiries do not have an adverse effect on your credit score—only the hard inquiries conducted by financial institutions do. (Generally speaking, a hard inquiry can only happen with your consent.)
2. Find the right card.
Contrary to popular belief, using a debit card exclusively isn’t a savvy financial move. Responsible credit card use shows credit agencies that you can be trusted to make payments on time. But deciding that you want an extra card in your wallet is half the battle—next you’ll need to narrow down your choices. First and foremost, compare the interest rates on different cards—the lower, the better. Next, consider the extras. Some companies offer cards designed for students with perks like rewards for good grades. Not every student will qualify, however—especially those without any income or bad to nonexistent credit history. If this sounds like your situation, a secured credit card may be your best bet. Cardholders are required to put down a refundable deposit to back up their line of credit; that way they can work on building credit while giving the card company some peace of mind.
3. Become an authorized user on someone else’s account.
For some students, signing up for a secured card is still a big leap into adulthood. Becoming an authorized user on your parents’ account is one way to make the transition a little smoother. Authorized users aren’t the primary holders of their account, but they do receive a card of their own they can use as they like. If your parents practice responsible credit habits then your score will receive a boost as a result. But keep in mind that the reverse is also true, so this option may not be a smart fit for every family.
4. Settle for one card.
Having a credit card and actually using it are important steps towards building credit, but you don’t want to go overboard. Apply for multiple cards at once and you risk jeopardizing your credit score before it has a chance to grow. Instead, focus on dealing with one card for now with the possibility of applying for another later in life.
5. Don’t let it go unused.
So you successfully applied for a credit card—now comes the time to actually use it. If your card stays untouched in your wallet for months on end you’re no better off credit-wise than you were without it. But using your card wisely is a careful balancing act: You don’t want to use it for too much too often or you’ll end up in debt. Rather than breaking out your card randomly and accidentally spending beyond your means, pick one monthly expense to charge to it. This could mean gas, groceries, utilities—anything you know you’ll be able to pay off once your credit card bill arrives.
6. Pay off the rest of your bills.
Your card payment record isn’t the only factor that can damage your credit score. Late payments made for other bills, like cable, doctors visits, and utilities, can all come back to haunt you when credit agencies are evaluating your history. Everything down to the smallest debts can have an impact, including that late fee you never paid your hometown library. Get in the habit of quickly paying what you owe early in life so it doesn’t become an issue down the road.
7. Get a credit-builder loan.
Before you’re ready to take out a loan on a house or a car, a credit-builder loan can serve as a good practice run. Like the name suggests, credit-builder loans exist to give people with little experience dealing with credit the chance to gain some. They’re usually lent out by credit unions, nonprofits, and small banks. When the customer receives the small loan (typically around $500 to $1,500) it’s locked in an account until it’s repaid. A successfully paid-off account can be shown as proof to credit bureaus that you’re able to make punctual payments.
8. Make your rent payments count.
If you rent your place and pay your rent on time every month, consider signing up for a service that will report these payments. While this won’t impact all of your scores—different credit agencies may access different information in their calculations—this could be the boost you need in the eyes of certain lenders.
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