There’s a lot to keep you busy during college — exams, working to pay for school, parties. But without a doubt, it is one of the best times to start thinking about your credit. If you want a leg up on your finances later in life, start to build credit as a college student.
First, let’s bust a common misconception: If you have no debt, you must have excellent credit. The truth is that to have good credit you must have credit accounts in your name and use them responsibly.
Good credit scores tell lenders and merchants that you’re likely to repay a debt or credit account on time. The better your credit the less you pay for debt, such as credit cards, car loans and mortgages.
But even if you don’t plan on financing a big purchase any time soon, your credit still affects your finances. Having poor credit means you could:
- Pay higher auto insurance rates
- Not be approved to rent an apartment
- Get turned down by a prospective employer
- Pay higher security deposits on utility accounts, such as a cell phone, power, and cable
Here’s how to build credit as a college student and reap the benefits of good credit for years to come:
1. Get a secured credit card
A secured credit card is an easy way to prove financial responsibility and build credit — even if you have bad credit. It works just like a regular, unsecured credit card, but requires you to put down an initial refundable deposit in exchange for a line of credit. The deposit amount varies, but could be as little as $50.
Use a secured credit card that reports payment data to at least one of the nationwide credit bureaus, so your transactions are recorded. If you make payments on time, that positive information helps you build credit.
But if you miss payments, that negative information is also recorded and can result in poor credit scores. In addition, the card company can take your deposit to repay your outstanding balance if you default.
A good strategy for using a secured card is to make small purchases that total less than 20% of your credit limit, and then pay off your balance in full each month. As soon as you have some positive credit data in your credit reports, apply for a regular, unsecured card. It allows you to build the strongest credit history and is a more convenient financial tool.
2. Become an authorized credit card user
In addition to having one or more of your own secured credit cards, you can build credit as a college student by being allowed to use someone else’s credit card. An authorized user is someone a card owner adds to his or her account with permission to have a card and make charges.
For instance, a parent can add a teenager or college student to his or her account. Unlike being a credit card joint account owner, an authorized user is not responsible for repayment of any amount of debt on the account.
Depending on the card company, the owner’s payment history may also appear on the authorized user’s credit reports. In some cases, creditors give an authorized user account less weight, or none, because they know the user is not responsible for repaying the debt.
Another consideration is whether the card owner makes late payments or maxes out the account. Irresponsible behavior that hurts a card owner’s credit may also hurt an authorized user’s credit.
Keep an eye on your credit reports for any negative information related to the card account. If you see any red flags, such as late payments, you can always ask to be removed as an authorized user from a card.
3. Get a co-signer on credit card
It’s typically pretty tough for college students under age 21 to get approved for their own unsecured credit card, unless they have a verifiable source of income. However, you can have a parent or guardian co-sign for a card and build credit.
The downside is that both you and the co-signer are equally on the hook for the card’s outstanding balance. Even if you make few or no charges on the card, you’re 100% responsible for repayment if the co-signer doesn’t pay for any reason.
Both you and your co-signer’s credit scores are also at risk if you miss payments or rack up a high card balance. Be sure that you completely trust anyone who co-signs a credit card application with you.
4. Get a co-signer for a loan
In addition to having a co-signer on a credit card, college students can also have one for a personal loan or car loan.
Alia Dudum, Millennial Money Expert at LendingClub, says, “I encourage anyone who needs credit to think about personal loans as a responsible way to pay for something expensive. You can’t always control when you have a major expense, but you can make good financial decisions.”
Using a mix of credit types, such as open-end lines of credit and closed-end or installment loans, will help you build credit as a college student. It shows potential lenders and merchants that you can manage different kinds of credit accounts responsibly.
Dudum says that making personal loan payments on time is a “huge action you can take to repair, maintain, and build up your credit profile.”
5. Check your credit regularly
As college students begin to build credit, it’s important to check it regularly. You can get a free credit report from each of the nationwide credit bureaus (Equifax, Experian, and TransUnion) every 12 months at annualcreditreport.com.
Errors on credit reports are common and can drag down your credit scores without you even knowing. Keeping an eye on your credit also allows you to spot fraudulent activity, such as accounts you didn’t open, which can devastate your credit.
If you see a mistake, get it corrected by filing a dispute with the credit bureau. And if you believe that you’ve become the victim of identity theft, quickly report it to the Federal Trade Commission and local authorities.
No matter your age, the key to building great credit is to have credit accounts and use them responsibly. Even making a small credit card purchase every month and paying it off in full and on time is a smart strategy to create and maintain excellent credit.