Credit is a tool that can be used to get a head start in life and can be leveraged to build savings, investments, and get ahead by paying for education or a home purchase. Building credit from an early age in a smart way can set you on a path to success before you even get out of college.
Credit scores range from 300 to 850 with 850 being a perfect credit score. Most lenders require a credit score of at least 625 to apply for a home loan. Banks look at your credit score to figure out how much of a risk you pose and whether or not to lend money to you and how much.
Many college students and young adults make the mistake early in their adult life of taking on too much debt or not making payments on time and this can seriously impact what you are able to do in the future, like buying a house or renting an apartment. Learning what to do now will have future you saying “thank you”!
Let’s dive in!
Why Building Your Credit Is Important
Even if you plan on paying for most of your smaller purchases in cash, having credit is important because it allows you to qualify for the big purchases later on like buying a house.
What some people don’t know though is that your credit score can help you rent an apartment or get certain jobs because landlords and employers run background checks on you and your credit history is part of that background check.
Employers want to know that you are responsible with your personal finances, especially if you are going to be handling money in your job. Landlords want to know if you are going to pay rent on time.
These background checks on your credit are “soft pulls” and don’t impact your credit score.
How to Build Your Credit In College
When you first get started, check your credit report. Even if you think you don’t have a credit score, it’s good to make sure before you start applying to anything. According to Javelin Strategy & Research, in 2017 there were over 1 million American minors that were victims of identity theft so requesting a credit report from the 3 major credit bureaus (Experian, Equifax, and TransUnion) will give a picture of where you are starting from.
If there are items on your credit report that you didn’t charge, dispute them as soon as possible with the credit bureaus.
Federal student loans allow young adults to take out loans for college without having a credit score. This helps the student build up their credit while in school and offers an affordable way to pay for college. If you can, start making payments on the loans while still in college to avoid some interest payments after you graduate and decrease the amount owed.
Don’t take out more loans than you need to pay for school and necessities. Many students run into problems taking out more than what is needed to spend on fun things but don’t have the money to pay those loans back later.
Apply for a secured credit card that has a low limit and pay it off monthly. This is a quick way to build up your credit. A secured card will ask for some collateral upfront so it poses little risk to the lender and the odds of getting approved are higher.
Be mindful of not leaving a huge balance on unsecured credit cards month to month or taking out too many cards. Too much debt could lead to missed payments or a high debt utilization rate. Each credit card or loan applied for is a “hard pull” on your credit and will impact your credit score.
Having too many hard pulls on your credit report reflects negatively on your credit and will signal to lenders that you are asking for a lot of credit which is a red flag.
Make your payments on time every single month or pay the card off every time you use it. Paying your card on time will boost your score and show that you are responsible and paying bills on time.
It’s possible to set up an auto draft from your bank account to pay off the credit card on the same day every month, just make sure you have enough in your bank account to cover the auto draft or you might be faced with an overdraft fee from the bank.
Keep in mind that debit cards don’t help with building your credit history because this activity is not reported to the 3 major credit bureaus.
Another point to note is that closing credit card accounts that have no balance on them will impact your credit history. The longer your credit history, the higher your score could possibly be because length of credit history is one factor of your overall credit score.
Keeping cards open that have no balance is beneficial for establishing a long credit history. Closing card accounts can have a negative impact on your overall score. But, banks will close cards that haven’t been used in a while so using the card and paying it off right away is the best way to build a positive credit history.
The Role Your Parents Can Play in Helping You Build Your Credit
Having financial conversations can be difficult and not every parent knows how to start the conversation so it may fall to you to start conversations about money or personal finance.
Many parents will share their experiences with building credit or mistakes they have made with their credit.
Parents or grandparents with good credit and positive credit history might be willing to add their minor child or grandchild as an authorized user to their accounts which can start you on your journey to building credit. Most unsecured credit cards won’t issue a credit card to anyone under 21 without either a co-signer or being added as an authorized user.
Becoming an authorized user is a big responsibility because your actions could impact your parents credit. If you are given a credit card for their account, make sure to give them the money to cover what you charged or to make the monthly payment as this will impact their credit and yours.
It is possible to be an authorized user without having access to the card so this is sometimes the safest route when young adults are first getting started. Make sure you trust the person that is adding you as an authorized user to pay their accounts on time because this could impact your credit negatively if they don’t pay on time.
- Credit: A contract between a borrower and lender where the borrower receives something of value from the lender with the expectation of repayment plus interest
- Credit score: A 3 digit number assigned to a person based on their previous ability to repay their debts that helps determine their eligibility for new credit
- Soft pull: Also known as a soft inquiry, authorizes someone to look at your credit but doesn’t impact the credit score and isn’t attached to a debt
- Hard pull: Also known as a hard inquiry, authorizes someone to look at your credit under the expectation of acquiring new credit and can impact the credit score by 5-10 points per hard pull
- Credit report: Statement of an individual’s credit activity, length of credit, history of payments, and status of current accounts
- Credit bureau: Company that collects information on individuals relating to their credit status and makes it available to potential lenders, landlords, and employers
- Debt utilization rate: Sum of outstanding credit balances, divided by the sum of total possible credit
- Authorized user: A person that is authorized by the account holder and lender to use an account but is not legally responsible to pay the bill
Books and Other Resources to Learn About Credit
Here are some of our favorite books on credit for college students. Be sure to head over to our entire personal finance books for college students library for more recommendations!
- Broke Millennial: Stop Scraping By and Get Your Financial Life Together by Erin Lowry. This book dives into personal finance for 20 & 30 year olds and teaches readers how to go from broke to killing the game! She covers the basics like savings, budgeting, and debt but, also, touches on having tough conversations with others about money.
- Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence by Vicki Robin. This book offers a 9 step process to change your relationship with money by focusing on ways to live more intentionally with money while leading a more fulfilling life. Learn skills like reducing debt, mindfulness of money spending, investing, decluttering, and so much more.
- The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness by Dave Ramsey. Dave Ramsey is lauded as “America’s favorite finance coach” and brings a tough love, straightforward approach to money, budgeting, and paying off debt.
- You Only Live Once: The Roadmap to Financial Wellness and a Purposeful Life by Jason Vitug. This book focuses on goal setting and intentional living with actionable steps to start making changes to your money and life today rather than waiting.
- I Will Teach You to Be Rich, Second Edition by Ramit Sethi. This book teaches you how to live life on your terms, enjoy things you love, and still have money to save and invest without taking all of the pleasure out of life.