The college years are an excellent time for young people to start building credit. The basis of a strong credit score is history, and the longer, the better! Demonstrating responsible credit usage early, and for an extended period of time, is a must when it comes to qualifying for loans, renting an apartment, applying for credit cards in the future, and more. Starting young is the best way to establish good money habits that pay off financially.
With little or no credit history, it can be hard to get a foot in the door as far as building credit. Anyone as young as 18 can apply for most credit cards, but it may be difficult to meet the approval requirements. Don’t be discouraged! Follow these tips from Kansas City Credit Union to start building a lifetime of good credit.
What is a credit score?
A credit score is a rating based on past credit history that indicates how likely a borrower is to repay a loan. Lenders use it to decide whether to approve a loan or credit card application — or not! — and what interest rate the borrower will pay.
The first step to building good credit is understanding what it means to have it in the first place. Credit scoring companies use a variety of information, including payment history, credit usage, and how long the applicant has had credit. The major companies that compile this information are Equifax, Experian, and TransUnion, and their data determines an individual’s credit score.
How do you get a good credit score?
To earn a high credit score, borrowers should:
- Make all payments on time
- Pay off balances in full when possible
- Avoid applying for multiple credit accounts at once
- Keep balances on credit cards below 30% of available credit
- Only borrow what they can afford to repay
- Routinely review credit report for errors or inaccurate information
- Monitor credit score regularly
What is the best way for a college student to build credit?
There is no single “best” way for college students to build credit. In fact, there are several. Taking out a student loan, using a student credit card, using a secured credit card, and becoming an authorized user on someone else’s credit card are all ways for students to build credit.
Student Loans
College is expensive! Many students take out student loans to pay for school. Private loans are difficult to qualify for with little or no credit history, so students often get a federal student loan instead.
Most federal student loans do not require a credit check, which makes them easier to obtain. Borrowers can begin paying the loan off and start building a good credit history, but it’s important that students borrow only as much as they can afford to pay back on their own and follow all repayment guidelines as specified by the federal government.
Making student loan payments on time is a great way to improve your credit score.
Student Credit Cards
Some credit card companies offer cards specifically for college students, and these can help young borrowers start building good credit.
These student-friendly credit cards are typically easier to qualify for than regular credit cards, with very little to no credit history needed. Some even come with benefits, like rewards on certain purchases or low annual fees. The main drawback of these cards is low credit limits and high interest rates. They also require proof of enrollment in a two- to four-year educational program. Students who take advantage of these cards should make sure to always make payments on time and keep their outstanding balance below 30%.
Secured Cards
Secured cards function like traditional credit cards, but they require a cash deposit up front as collateral.
This option is more accessible to those without a history of good credit, poor credit, or no credit at all. Unlike regular credit cards (an unsecured card), a secured card is financed by the cardholder. Different issuers offer different terms, but as a rule, the credit limit is generally the same as, or close to, the amount put down by the cardholder. For example, if the security deposit on a secured card is $200, the secured card’s credit limit will be $200. If a card payment is missed, the lender uses the money financed by the cardholder to repay the debt.
With a secured card, the cardholder funds the security deposit, and the issuer reports account activity to the credit bureaus to help establish credit history.
Some financial institutions offer secured cards with deposits as low as $50. Others include the option of transitioning the card from a secured card to a traditional credit card after the cardholder proves their creditworthiness. Often the original deposit will be refunded, and the limit on the new unsecured credit will equal that amount – sometimes more!
What’s most useful about a secured card is that, unlike a debit card, it can be used to start building credit as long as the payment history is reported to at least one of the three credit reporting agencies mentioned earlier, making it a great credit-building tool for young people.
Become an Authorized User
A student with a parent, guardian, or other adult willing to share their good credit can become an authorized user on that person’s credit card to start building their own credit history.
Authorized users on a credit card are like a secondary account holder. They receive their own card with their name on it, and the card has its own credit limit. Payment history is recorded under the authorized user’s name, so it can be used to start building good credit, but only if the primary account holder has good credit, too.
The authorized user is technically not the responsible party when it comes to repayment; the primary account holder is. Therefore, the primary account holder and the authorized user should have some sort of reimbursement agreement in place so that the authorized user is not only building better credit, but is also practicing good financial habits.
Need help applying for a credit card or exploring your options for building strong credit? Talk to the financial experts at Kansas City Credit Union! Our team is ready to help you get started on your own path to financial freedom.
