For many young adults, college is a gateway to complete independence.
During my last semester of college, my friends and I often talked about how scared we were to enter the “real world” and experience all the major life transitions that come with early adulthood. Suddenly, assuming the financial responsibility of things like buying a new car and post-grad apartment leasing was just around the corner.
Many of these new responsibilities require a credit history and score, but building credit can be intimidating and may even feel like a distant concern for many students and young adults. Starting early, though, can make those major life transitions less scary and a lot easier.
What does it mean to “build credit?”
Building credit means proving you can borrow money and responsibly manage your debts. Both VantageScore and FICO credit scores, the primary credit score scales in the U.S., range from 300 to 850 and measure how likely you are to pay back borrowed money based on factors like payment history, amounts owed and debt-to-available credit ratio (your credit utilization). The number fluctuates depending on your credit habits. Consistently demonstrate that you can effectively pay off your debts, and you’ll be on your way to building a strong credit history.
The importance of a strong credit history
Building a strong credit history doesn’t happen overnight. It takes time to establish a high credit rating, so the sooner you start, the better. Therefore, building credit in college smooths the path for future financial decisions.
According to Equifax, one of the three major credit reporting bureaus, a credit score of 670 and above generally indicates you are a low-risk borrower. This means you have a higher chance of receiving loans. In addition, having a strong credit history can result in lower interest rates and insurance discounts. Generally, the higher your score, the lower your rates and more likely you are to receive a loan.
Your credit history can come into play in some unexpected ways. If you’re looking to rent an apartment, landlords may look at your credit report as part of the application process. In some states, potential employers can look at your credit report as part of the job application process.
You want to ensure that your credit history stays strong by practicing good credit habits, like paying your bills on time, spending within your means and monitoring your credit reports.
Ways to build credit as a student or young adult
So what can a college student do to lay a firm credit history foundation? There are more opportunities than you might think.
Open a credit card
Credit cards offer one of the fastest and most straightforward ways to build credit. If you’re under 21, obtaining a credit card will require meeting some additional requirements such as applying with a cosigner or showing proof of independent income, but lots of young students have them so it is certainly an option.
Student credit cards are excellent options for college students with little or no credit history. These cards function like any other credit card but usually have lower credit limits and perks that are specifically catered toward college students, such as cash back incentives for common college lifestyle expenses or Amazon Prime Student memberships. Most importantly, banks issue these cards to individuals with minimal credit history.
Jocelyn Hidalgo, a recent Athens Technical College graduate, got her first student credit card when she was 18. She applied online and said the process was quick and simple.
“I finally felt like an adult,” she said.
Become an authorized user
As an authorized user, you have a credit card in your name that is linked to the primary cardholder’s account. You can make purchases on the card, but the primary account holder is ultimately responsible for paying it off. It’s a good way to start building credit if you are not eligible for or able to commit to the responsibilities of having your own credit card account.
In most cases, the primary cardholder’s account history is added to your credit report. Because your credit history will reflect the account holder’s, it’s important for the account holder to manage their credit responsibly. If they act irresponsibly, it can negatively affect your credit, so only consider becoming an authorized user when you fully trust the primary account holder’s ability to handle their account well.
Begin repaying student loans
Making regular, on-time payments to any student loans you take out in college can help build your credit. While private loans usually require a credit check for approval, most federal student loans do not. Keep in mind that student loans are not revolving debt like a credit card is. That means they qualify as a different type of account – an installment loan – on your credit report. Part of building a strong credit history involves showing responsible payment of several types of accounts; therefore, a student loan and a credit card could offer your credit score a boost.
While the deadline to begin payments for student loans is after you’ve finished college, you can start making prepayments while you’re still in college. Not only will you start building credit sooner, but your loans could also accumulate less interest in the long run.
What to avoid when building credit
It may be tempting to spend more than you can afford when you get your first credit card, but a habit of overspending can lead to growing debt that could negatively impact your credit score. You should never max out your credit card by spending up to your credit limit. A good rule of thumb is to keep your credit utilization ratio below 30%, which means your card’s balance should never exceed 30% of your credit limit. If you have multiple cards, keep the total balances below 30% of your total available credit.
When I got my first credit card, I was advised to treat it like a debit card. In other words, only rack up a balance that I knew I could pay off with the money currently in my bank account. I’ve followed this advice ever since, which has allowed me to pay off my credit card balance in full every month, avoid any debt buildup and show responsible use of my credit card.
Failing to pay bills on time
Payment history is the most important factor in determining your credit score. Not only will your credit score decrease if you don’t pay bills on time, but banks can also charge late fees or even increase your interest rate if you don’t pay on time.
It’s ideal to pay off your credit card balance in full each month to avoid interest, but if that isn’t possible you should always pay at least the minimum amount required by each month’s due date to avoid late fees, penalty rates and, potentially, a drop in your credit score.
Signing up for too many credit cards
Having multiple credit cards doesn’t necessarily mean you will build credit more quickly. Only having one monthly balance to pay off is simpler than having five. With no credit experience, it can be risky to have multiple monthly balances to keep up with. You want to practice responsible credit card habits from the start, so it’s better to ease into building credit with one credit card and then work your way up to adding more.
Starting your credit journey early can save you time and money in the future. In fact, parents can give their children a boost by adding them as authorized users even well before college.
Rosie Eubanks, a fourth-year student at Georgia State University, said having a credit card in college has not only helped her rent an apartment, but also has taught her how to manage and budget her personal finances.
“In my experience, it makes you more aware of what you’re spending,” Eubanks said.
When you start to build credit as a young adult, you can learn a lot about money management and responsible spending habits that will set you on a path to achieving your financial goals.