6 basic rules of building good credit for students
By Miranda Marquit
January 8, 2015
When you are starting out at college, buying books and cheap furniture are foremost on your mind. One of the last things on your college checklist is building good credit, but it's one of the most important.
Without good credit, say goodbye to your dream car and maybe even your dream job. With good credit, you can get sweet interest rates that cut your monthly payments, more affordable insurance premiums and you can qualify for an apartment you love.
Take these credit steps to build your financial future:
1. Check your credit report.
Before you try to take out a credit card or a car loan, go to AnnualCreditReport.com. You can pull your credit reports once a year for free from the three major credit bureaus: TransUnion, Equifax or Experian. Bookmark this link, because you can check one of the three reports every four months rather than checking them all at once. Make sure everything on your report is accurate, because the information contained in the reports decides your credit score, which lenders, employers, landlords and insurance agencies can use to decide if you are creditworthy.
If there is any inaccurate information, dispute it with the credit bureau by snail mail, because you forego some litigation rights by disputing online. Here are the mailing addresses for disputing errors with TransUnion, Equifax and Experian.
Now, when you go to pull your credit reports, there may not be one to pull, and that's to be expected if you have never taken out a loan or card. But by following these steps, you can build your credit.
2. Create and follow a budget
You need a budget you can stick to. Many students get in trouble because they don't track their spending. If you don't plan your spending, it's easy to get in over your head with debt — and ruin your credit reputation.
“Make sure you have a simple budget in place,” says Kevin Gallegos, a consumer debt specialist with Freedom Financial Network. “There's plenty of free software available.” Budgeting apps include Toshl Finance, Hello Expense, and Expense IQ-Money Manager.
3. Open a credit card account
Thefastest way to build a credit history is with a credit card. The Credit CARD Act made it more challenging for students under the age of 21 to obtain a card, however. In order to qualify, you need proof of income or a co-signer. You can also consider applying for a secured card, if you can't qualify for a “regular” unsecured credit card.
“The biggest mistake college students make is they lose track of their bills because they don't get forwarded.”
–David Bach, Edelman Financial Services
If you have a job and can prove your income, you can probably qualify for a credit card even if you aren't 21. If you don't have a job, ask your parents to co-sign or add you as an authorized user to one of their cards. As an authorized user, you benefit from your parents' good credit habits without being legally responsible for the debt. It is easy to be added or removed from the account as an authorized user, while it is more complicated when you are a co-signer.
Once you have a card, make a small purchase or two each month and pay off the balance. Your creditors will report your activity to the credit bureaus each month, helping you establish a history.
David Bach, the vice chairman of Edelman Financial Services and author of “The Automatic Millionaire,” suggests that students start by getting only one card, rather than signing up for several.
4. Pay your bills on time
Your payment history impacts your credit score more than any other factor. In fact, it's 35 percent of your FICO score, the scoring model most lenders use. “Having a credit card can help you build credit provided you pay the bills on time, every time,” Bach says.
Other payments, including utility bills, should also be made on time, because missed payments can be reported to credit bureaus if the account is turned over to a collection agency.
When you move, ensure that your creditors and service providers have your new address so that you don't end up missing payments. “The biggest mistake college students make is they lose track of their bills because they don't get forwarded,” says Bach.
5. Keep debt levels low
Pay off your card's balance each month so you don't build up debt. The amount of debt you have in relation to your credit limit accounts for 30 percent of your FICO credit score, so you don't want to carry over big balances from month to month. Keep debt levels low — or at zero — as you work to build good credit.
6. Open an installment account
Once you have established your ability to manage a credit card responsibly, you can give your credit score a boost by opening an installment loan account. Credit cards are revolving loans; they have no fixed terms, and you can keep borrowing as long as you make payments and have available credit. Installment loans, such as student or car loans, have fixed terms, and you make set payments each month.
Being able to show that you can make regular payments is important. Your credit score will benefit from your on-time payments within a few months. Continue to check one of your credit reports every four months to make sure your credit history is building and is accurate.
Your good credit can open financial doors for you throughout your life. The right moves now can mean thousands of dollars in savings over your lifetime, as well as access to other opportunities.
“Everything is reported, and now you're being tracked,” says Bach. “This is not a joke.”