Credit is often spoken about as though it’s some mythical creature that can only be seen by soothsayers or special wizards. The reality is that building credit is available to everyone. You don’t need to be wealthy to build your credit score. In fact, the more financial trouble you’re in, the more beneficial it will be for you to improve your credit.
College students often feel immune from financial matters, assuming that their credit score doesn’t matter until they graduate and start a job. However, college is actually the ideal time to build your credit score. Most college loans offer long repayment timelines, meaning there is less pressure on you to make big monthly payments.
Once you get your degree and start looking for jobs and apartments, your credit score will suddenly become very important. This is a brief guide for how to responsibly plan for that period of your life:
Credit builder loans
A credit builder loan is ideal for any student looking to build financial credit without taking unnecessary risks. In fact, some financial analysts recommend credit builder loans over credit cards because they are secured loans with low interest rates. The amount you borrow is held in a bank account while you make equal, periodic payments over time.
You also typically do not need a high credit score to acquire a credit builder loan in the first place. They require no upfront cash.
Credit builder loans are great for college students because payments are reported to all three of the major credit bureaus – Experian, TransUnion, and Equifax – but they require minimal collateral and risk. Thus, they are a smart way for college students to build their credit score without taking the chance of credit card spending sprees or, worse, identity fraud.
Perhaps the biggest selling point of this kind of loan is that no money is needed upfront to secure it.
Responsible credit card use
Credit cards can be the bane of your existence if you don’t use them responsibly. For example, if you live off your credit card and spend beyond your means for years, you can accumulate a pretty grim debt that can adversely affect your future.
On the other hand, if you use a credit card responsibly, you can use it strategically to build credit. Credit card payments are great ways to build your credit score, so as long as you use it sparingly to pay things like utility bills, groceries, gas for your car, and other costs of living, you should be able to manage it.
The key is not using your credit card to purchase anything that you don’t already have the funds to match in your checking account. The only exception is if you know that you have money coming in during the near future. In other words, don’t think of your credit card as free money; look at it as an extension of your available (or near future balance), which is what it is.
A credit card – particularly a secured credit card – can also be a great way to mortgage something like an auto loan or even a home payment…if you know you will have the funds coming in. For instance, if you get a good job or if your student loan provides enough, you can put down payments on credible items and living expenses that will also build your credit. Just make sure you set it up as something that will be charged in monthly installments.
Get an authorized user
One of the best ways to build credit using a credit card is to have your parents – or any responsible spender directly associated with you – become an authorized user of your credit card. In other words, the activity of your parents’ credit card spending would reflect on your account.
This sounds kind of weird at first and it certainly doesn’t work for everyone, but if your parents are responsible financial players, signing them up as authorized users can be an easy way to build credit. If your parents have the money to make large debt repayments on their credit cards every month, that bodes very well for their credit score. If a bank or credit union approves them as authorized users, their monthly activity will factor into your credit score as well.
