Strategies to Build Credit for College Students
It’s never too early to start building credit. In fact, the college years could be the ideal time to do so, before taking on the daily expenses of “real life” after graduation. There are some viable, realistic strategies to build credit for college students to consider.
People as young as 18 can apply for a credit card, but the approval requirements are much more stringent than for those 21 and over. Income from a job may help a student qualify, but most students who work do so part-time.
Here are a few tips from Kansas City Credit Union that may serve as a blueprint for starting early in building a lifetime of good credit and reaping the benefits it brings.
Student Loans
College is expensive, and more than half of college students today take out loans to attend school. Qualifying for private loans with little to no credit history is difficult, but a federal student loan may serve two purposes: financing education and serving as a building block for establishing credit.
Most federal student loans do not require a credit check, allowing students to borrow money to pay for school and build credit by repaying those loans after they graduate. However, students should use loans only to finance an education that leads to a job with sufficient income to repay the loans. Additionally, the student loan environment is currently uncertain, and the governmental relief that some former students may benefit from in the short term may not be available for current undergraduates. Read more here on this topic.
Therefore, students should borrow only as much as they can afford to repay on their own, following the schedules and guidelines set by the federal government.
Become an Authorized User on an Established Credit Card
Another option is for a parent, guardian, or adult willing to co-sign an application or add the student as an authorized user on the adult’s card. In this case, the student is issued a card with their name, but the card’s availability is based on the actual cardholder’s credit score and history. The student has all the purchasing power and privileges of the actual cardholder and is expected to make payments on time. However, the responsibility for payment ultimately belongs to the person allowing the student to “piggyback” on the card, and late payments will affect the cardholder’s standing.
Another benefit – individuals under 18 can be added as authorized users. This helps establish credit even earlier because most credit card issuers report payment history and account usage to credit scoring agencies. So, students should be aware that missed payments or large balances can have a negative effect on both parties’ credit.
Get a Secured Credit Card
Many credit card companies and banks offer secured credit cards. A secured credit card is one that is fully financed by the cardholder. The applicant deposits cash, sometimes as little as $50, which the card issuer holds as a security deposit, and which becomes the holder’s credit limit. Policies vary from institution to institution; for instance, some are more generous in the amount of credit they are willing to extend in return for a lower cash deposit. They may even convert the secured card into a traditional credit card after a certain period. In such cases, the cardholder receives their initial cash deposit back as full credit, effectively doubling their credit limit.
As an example, a person may obtain a secured card with an initial cash deposit of $300. If the card eventually becomes a “regular” credit card, that person will now have a credit limit of $600 – the initial cash deposit plus the credit amount they have proven themselves capable of handling.
Secured cards are a good way to establish credit, especially for young people who may not have a source of income since the applicant assumes all the risk. It’s crucial to ensure that the issuer reports the card’s activity to the credit bureaus to start building a good credit history.
Understand the Basics
Make sure to educate yourself on how a credit score works and why it’s important for making smart financial decisions. Learn more at Equifax, one of the top 3 credit bureaus in the United States, on how to check your credit score.
A credit score is a rating that credit bureaus assign to individuals based on factors such as the amount of credit they have available, how much of it they use, how long they’ve had credit, and payment history. Here are a few things to keep in mind:
- Make all payments on time and, whenever possible, pay off balances in full.
- Avoid opening multiple lines of credit at the same time. Credit checks have a detrimental, though short-term, effect on a credit score, and people with longer credit histories and fewer accounts are seen as less risky.
- Avoid high balances on credit cards. Lenders tend to consider 30% the ideal rate of utilization. Most young, first-time credit cardholders start off with a relatively low credit limit. So, a credit line of $1,000 means that no more than $300 should be used. When it is, though, paying enough that the balance falls within that limit, if not paying the balance in full, is advisable.
