Build Good Credit Early: Life Hacks for Boosting Your Credit Score as a College Student or Recent Graduate

BY John Schmoll

Build Good Credit Early: Life Hacks for Boosting Your Credit Score as a College Student or Recent Graduate

If you’re a college student or recent graduate, you have a lot to focus on. If you’re in college, you’re taking classes, likely living away from home for the first time and juggling a social life with other responsibilities. If you are a new grad, you’re likely looking for your first “real” job, considering a move and dealing with other potential stressful realities. One of the last things on your mind is probably how to build credit.

You may have heard your parents talk about credit and think it’s only for those who want to buy a house or car. And while you may not realize it, building credit goes well beyond just those issues. If you want to begin to building your credit but don’t know where to start, the following tips can help.

Why Should You Be Concerned About Your Credit Score Now?

If you’re still in college, you may think a credit score is something you can worry about later. But like we mentioned earlier, your credit impacts much more than buying a house or car. Most relevant to you as a college student? The fact that your credit history and score can impact the rate you pay on your student loans. That means the lower your credit score, the more you will pay.

You can protect yourself by doing your homework before applying for loans. This will limit the number of inquiries to your credit, which can eventually add up and lower your credit score. Although a few inquiries won’t be a major hit to your credit, fewer inquiries means less impact.

The same theory holds true if you want to consolidate your loans once you graduate. Do your homework prior to graduation, and you should be fine.

Who's Interested In Your Credit Score- (4)Building credit also has value beyond your student loans. There are many other parties interested in your credit score, such as:

  • Insurance companies
  • Landlords
  • Potential employers
  • Utility companies

Having a good credit score early on can help you rent an apartment after college, land your dream job, and even save on basic things like insurance and energy bills.

What Makes Up Your Credit Score?

Now that you know why you should be concerned about your credit score, you should know how your credit score is calculated. There are several different factors that can impact your credit score.

A credit score is comprised of the following five weighted factors:

  • Payment history – 35%. This refers to whether or not you have a history of paying your accounts (including bills and monthly debt payments) on time). A history of on-time payments will help your credit score.
  • Amounts owed – 30%. This is a reference to the total amount of debt you have, and can include student loans, auto loans, home loans, credit card debt and more. Owing money does not mean you will have acredit score
    low credit score, although it is a factor.
  • Length of credit history – 15%. The longer you have a credit history, the higher your credit score is likely to be. This includes how long you have had credit cards and account open, the average age of your accounts, and how long it has been since you used each account.
  • Credit mix – 10%. This refers to the combination of credit accounts under your name, including credit cards, retail accounts, loans, mortgages and more.
  • New credit – 10%. Opening several accounts in a short period of time can mean a lower score.

What goes into your credit score is pretty straightforward. But making it grow in the direction you want is another matter.

How to Build Your Credit Score

So – how do you build credit while in college? Looking at what goes into a credit score, it may seem daunting to build credit when you’re just starting out. But that’s is not the case.

One of the best ways to build credit as a college student is to have your parents add you as an authorized user on one of their credit cards. The benefit of being added as an authorized user? Your credit score gets a boost from the history your parents have on that card.

credit card dos and dontsBut do your research before you ask to get added to your parents’ accounts. If your parents don’t have good credit themselves, this could backfire. But if they do have good credit, this can not only can help you build your credit score, but also help you learn some healthy credit habits by watching what your parents do with their card each month.

Other ways to build credit as a college student, which include:

Get your own credit card: Don’t look at this as a license to spend money you don’t have on things you want but can’t afford. Use the card for small purchases, and pay off the balance in full every month. It’s important to note that the CARD Act requires you to show proof of income to get a credit card (or have a co-signer if you are under age 21).

Looking to start building your credit with your own credit card. GoodCall has an extensive guide highlighting the best credit cards for building credit. We also recommend The Simple Dollar’s detailed analysis of the best student credit cards.

Pay your credit card(s) off each month: This is the most important part of getting a new credit card. You want to pay it off in full each month – this will help grow your credit score, and prevent you from accruing interest on the things you purchase.

Pay other bills: This may not impact your score in a huge way, but not paying your other monthly bills (including rent, cell phone, internet, and utilities) can negatively impact your credit score.

Consider other types of credit cards: If you’re unable to get a credit card or be added to your parents’ card, you may want to consider a secured credit card. A secured credit card is tied to a savings account that backs or “secures” the card. Like a regular credit card, use the card for small purchases, pay it off each month and begin to build credit.

Things to Avoid

Just as there are actions you can take to improve your credit, there are also things that can negatively affect your credit in a big way. These include:

Applying for multiple cards: The more inquiries you have for new credit negatively impacts your credit. Instead of applying for multiple cards, do some research first to find the best one for you and then stick with that.

Not paying off your balance each month: Emergencies come up, and it can be tempting to let your balance grow if you’re tight on money. But ideally, the only time you should use your card is if you can pay it off each month.

Closing cards: This sounds somewhat counter-intuitive. But you don’t want to open cards only to close them – especially your oldest card. Closing a card will only shorten your credit history and lower the amount of credit you have available. Both can negatively impact your credit.

Co-signing for someone:  There are many ways to help out your friends. Co-signing a credit card for them shouldn’t be one of them. You can’t control someone else’s ability or inability to pay, and that leaves you open to risk.

The Bottom Line

Building credit as a college student may seem overwhelming, but it doesn’t have to be. With a smart and balanced approach, you can begin to grow a healthy credit score that will benefit you now and in the future.

A few things to remember:

  • Your credit score is determined by a number of factors, including your payment history, the amount you owe, your credit history, your credit mix and your new credit
  • Actions you take now (like applying for credit cards, paying off your balances and paying for bills) can affect your credit – positively and negatively – in the long-term
  • Although you might think your credit score doesn’t matter as a student or recent grad, it does – people like landlords, employers and even insurance agents sometimes use it to make decisions

The sooner you start building your credit, the better – and the easier you’ll find it is to purchase things like cars and even houses down the road.

Expert Advice

 

Julie Pukas TD Bank

Get a line of credit: In order to establish credit history, you need to have a form of credit. The simplest way for you to begin will be to open a credit card. If your score is low or non-existent, then you’ll need to apply for a secured card or a store card.

Secured Card: Your own money serves as collateral by putting down a deposit with the bank, which typically becomes your credit limit. Once you prove you’re responsible, your deposit is refunded and you can upgrade to a regular credit card.

Store Card: People with a low credit score can often still get store cards because banks are more likely to approve users who apply through the store. The catch is that the interest rates are often very high if you can’t make your payments.

Keep your utilization rate low: Your goal should be to never let your spending exceed 30% of your credit limit. The lower your utilization rate, the better your score will be.

Pay in full, and on time, each month: Prove you’re responsible by only charging what you can afford. There is also no advantage to only paying the minimum amount due on your card. That will only result in you paying interest and does nothing to help your credit score, so just save yourself money and pay your entire bill.

Use the card for needs, not wants: When you’re still building credit, be judicious in spending and do not make purchases that you cannot pay off each month. Think of it as a loan to yourself and pay it back as soon as possible to avoid interest charges.

Additionally, some things to avoid that may hurt your credit score:

Opening too many credit cards: Having too many credit cards can negatively impact both your credit score and your ability to borrow money. Adding more cards helps your score by lowering your credit utilization ratio — the amount of debt you carry compared to your available lines of credit. However, if you have a lot of credit cards with high credit limits and you apply for a mortgage, the lender will take into consideration, ‘What if you ran those credit cards up? What would your debt-to-income ratio be?’

Misunderstanding introductory rates: A majority of credit card programs offer an introductory period, typically 15 months, which includes a 0% interest rate. If you don’t want a higher monthly payment, it’s important to pay down as much of your existing debt as you can before the interest rate is applied to your monthly bill.

Choosing a card that doesn’t match your spending: Consumers may be tempted by attractive reward programs rather than figuring out what card is best for their unique spending habits. For example, if you tend to spend on dining out, find a card that offers high rewards on dining.

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Jesse Levey Credit Sesame

Credit is cumulative, so the sooner you start establishing good credit, the better credit you will likely have in the future. Good credit can help students and recent grads with things like renting an apartment, buying a house, a car and opening a credit card, in addition to getting the best rates on student loans. Good credit means a less expensive road ahead, which is important because a better credit score will ensure lower interest rates that will save money in the long run. Establishing credit early on also helps teach financial responsibility and creates good habits that will serve people well in the years to come.

Credit should not be intimidating. It’s actually quite simple if you learn about it and use it responsibly. Opening a student credit card for college students or recent grads is a great way to slowly start establishing credit. It’s important to use the tools and resources that are out there to develop good habits early on. A great place to start is Credit Sesame, where you can see your credit score, see recommendations for financial products that are best for you, and monitor any changes to your credit. You can also use Credit Sesame to track and build your credit over time.

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Kevin Haney savvyoncredit.comRecent graduates should build credit in order to save money on car insurance. Most companies use credit scores to set premium rates. Later on in life, their score will also affect what they pay for homeowners insurance.

Most graduates automatically build credit when they begin paying on their student loans. Make on-time payments. Graduates should also deepen and diversify their experience by opening and managing a variety of accounts responsibly like Department store credit cards, Secured credit cards, or Automobile loans or leases.

The length of history and mixture of credit experience make up 25% of the score for the *average* consumer. However, these two factors are much more important when just getting started. The best way to improve on both metrics is to begin as early as possible. It takes time.

Avoid late payments. Delinquencies (30 days late or worse) on a consumer report hurt recent graduates the most. Recent graduates rarely have enough compensating factors (length of history, mixture of accounts) to balance out the negative information.

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Shamus McConomy GTE Financial

While many people associate credit history and credit scores with the ability to get a loan and at what rate, credit histories can be utilized in other areas. For example, renting a house or an apartment typically involves a credit check. Utilities will use your credit score to determine if you need to provide a deposit before being hooked up. Insurance rates can be affected by credit scores.  In some cases, even potential employers will use credit history in determining their ability to hire you. The earlier you can start developing a good credit history, the sooner you can start gaining the benefits of a good credit score.

College students and recent graduates should not overextend themselves when it comes to credit cards. They will most likely start receiving credit card offers in the mail and should resist the temptation to accept them all. Having a credit card for emergencies or to help facilitate travel is a good idea, but having too much access to credit can be perceived as a bad thing too.

Make a budget and stick to it. Don’t use a credit card to supplement your lifestyle. If you can’t afford to pay for something, you probably don’t need to put it on a credit card. Pay off your credit card monthly to avoid finance charges. It can be a good thing to have your bills put on auto debit so you don’t miss a payment (but be sure to remember when those payments will be debited from your account).

If you are going to purchase a car, a Honda Civic will get you to class or work just as well as a BMW. A car is a depreciating asset so don’t allocate too much of your income towards paying a car loan. Remember that you’ll have to pay insurance too when you’re deciding how much of a monthly payment you can afford. Be aware of market interest rates so you know if you are getting a fair rate.

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Andrew Josuweit Student Loan HeroEven though you might feel like you don’t need to worry about good credit right now, it can be really difficult to quickly improve your credit score later when you suddenly do need to access credit. This could be for a car loan, applying for a new job, or searching for an apartment. Each of these things requires credit, so already having good credit is essential.

Credit mistakes, unfortunately, aren’t wiped out very quickly either. For example, a late or missed payment can stay on your credit report for seven years and hurt your credit score while it remains. There really aren’t any tricks for dealing with this either.

Even if you don’t have any negatives on your credit, it’s not easy to just increase your score overnight. Getting a better score can take time as it depends on your overall history. The longer positive history you have, the better for your credit score.

Because of this, it’s best to start out on the right foot. A good credit score can be as easy as using credit responsibly. Don’t miss payments, don’t rack up credit card debt, and avoid defaulting on your loans.

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Linda L Jacob author of no more paycheck to paycheck

Many young people don’t realize that a credit check is done not only by lenders, but many potential employers will check your credit, a landlord will check your credit, and any job that requires a clearance will check your credit, just to name a few. So, even if they don’t see the need for a loan in the future, it’s still important to keep your credit in top shape. This is done by making your payments on time, month after month, restricting the use of credit lines to one-third, and not applying for unnecessary credit.

My advice to the recent grads is this: Spend less than you make! Using credit is a slippery slope, and it must be used diligently and with much thought prior to the purchase. Our society screams at us that we can have it now, you deserve it, and you only need to worry about the monthly payments. But this attitude will bring you financial hardships.

Instead, if there is something you want to buy, set a specific goal. Decide how much you need, and when you need it. Then, save from each paycheck until you reach your goal.  Think of it as making the credit card payment to yourself before you buy, instead of making the credit card payment after the purchase when you have pay interest too.

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John Drapeau Credit Card Management Services, Inc.
 As a Credit Counselor, I have seen people work very hard to overcome mistakes made early on in their financial lives. My advice on how to avoid the pitfalls caused by poor financial decisions often made from a lack of knowledge of how important good credit is and how easy it can be to build  it.
 
More and more employers use credit reports and scores to rate potential employees. The competition for decent jobs is such that, with all things being equal, employers may rely on credit reports to see if personal decisions about the applicant’s finances are smart decisions.
 
Landlords use credit reports to determine if potential tenants pay their debts on time and if carrying a lot of debt, is there the potential to be unable to meet all financial obligations.
 
Getting ready to buy a car? Those with excellent credit today are being offered car loans at a 0% interest rate. Those with average or lower credit ratings may have to struggle to even be approved for a loan. And, if approved, may only be offered APR’s as high as some credit cards. And, once the automobile is purchased, auto insurance must be applied for. In some states, the higher your credit score, the lower your premiums.
 
If you have a medical bill, pay it. If it’s not possible to pay the medical bill in full, contact the medical provider and arrange an agreeable payment schedule and honor it! Make sure the payment arrives prior to when it is due. And remember that automation works for the creditor and it can work for you, too. Set up automatic payments so that all of your monthly bills are paid on time.
 
Shortly after graduation, those student loan payments will be coming up. Be prepared to pay them as agreed. If there are multiple student loans, start documenting who the lenders are and how much is owed to each one. And, when it comes time to start repaying them, don’t wait for the lenders to contact you. If unsure who the loans are with, visit the NSLDS site to view your Federal Student loans.
 
If you have private student loans, consider refinancing them. With a higher credit score, there may be an offer for… lower APR’s on the refinanced loans!
 
To maintain a good credit score, make sure to monitor your credit. I usually suggest registering for the free information available at CreditKarma.com, CreditSesame.com and Credit.com. They tie right into your actual credit reports at the three major credit bureaus, TransUnion, Experian and Equifax. Once a year, you can receive your credit reports from all three bureaus absolutely free at AnnualCreditReport.com. And, set up alerts for unusual or fraudulent activity with your bank and credit card accounts.
 
And, if life happens and you find your credit in need of a tune-up, look for help through a non-profit credit counseling agency.
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Brittani Bushman AAA Fair Credit FoundationBuilding and establishing a good credit history is crucial for obtaining favorable terms/rates on future expenditures such as loans, renting your own apartment, and even getting low insurance premiums. Since the time after graduation is a key time for some of these changes, having your credit already established can save time—and money. Without an established credit history, you may be required to put down a higher deposit, pay a higher interest rate, or you may even have to wait until your credit is more established. Although lenders may have different requirements, usually two years’ worth of credit history is best.
 
If you took out any student loans during school, these would have been building your credit. It is better to have more than one type of credit item though, so opening a credit card in conjunction with any student loans you may have will help build your credit significantly.
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Alex Gerard Cardsmix.comThe length of a credit history is one of the very important factors – it accounts for 15 percent of your credit score. Moreover, it is the factor that you will not be able to improve faster later in your life when you will need a perfect credit score – when shopping for a mortgage or a car loan, for instance.

The best way to start building credit is to get a credit card and start using it responsibly. Luckily, there are many credit cards, available for students today, that will help you to build your credit score and take advantage of extra perks and rewards when you use your card.

You must be over 21 to get approved for a card. You also need to have an independent source of income, otherwise, you will need to bring your parents as co-signers on your account.

If you are under 21, the best start will be to get on your parents’ credit card as an authorized user – it counts for your credit history as well.

After getting a credit card, you need to use it responsibly. Here are some important rules that will help you to grow your credit score over time:

1. Always pay your balance in full. A credit card is a tool to work on your credit, forget about using it as a source of credit.

2. Never over-utilize your credit. Use no more than 30% of your credit limit. Refill the balance several times a month if needed.

3. Always pay on time. Make it a good habit to send payments 3 days before the deadline.

If you follow these rules, your credit will get into ‘good credit’ territory in a short one year period.

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Priyanka Prakash

College students and recent grads often put off thinking about their credit, but there are a lot of good reasons to start thinking about it today. In addition to impacting big life decisions, such as the purchase of a house or car, bad credit can also prevent you from renting the apartment you want or getting the job you want. Prospective landlords and employers check credit, and if your history shows that you are not financially responsible, they will think twice.

Get a secured credit card – if you haven’t built up sufficient credit, then you can get a secured credit card, which is a card backed by a monetary deposit. A secured card prevents you from overspending because your credit line is limited to the amount of money in your linked checking account.

Set up auto bill pay – Setting up auto bill pay will help you avoid missing a credit card or loan payment.

Use extra income to pay down credit card and student debt – The amount of debt you have makes up about 30% of your credit score. Use income from part-time jobs to pay down your student loan debt and credit card debt. Focus first on credit card debt because of the high-interest rates.

Fix errors on your credit report. Get a free copy of your credit report at annualcreditreport.com, and have any errors fixed. About 4 out of 5 credit reports contain errors, and having these resolved can quickly boost your credit score.

Avoid scams like credit repair services telling you they can help you increase your score in days! This isn’t true, and you can do most of the stuff yourself that a credit repair service would do. Also, many people are tempted to get more and more credit cards to increase their outstanding available credit. This can backfire on you. Every time you apply for credit, there’s a hard pull of your credit report, which can dent your score by 1-5 points.

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Jeff Herman creditcards.comAs a student or recent grad, you’re a millennial, so debit likely is your payment of choice. That’s smart for your budgeting, but not so much for building your credit. Your credit is checked for some apartments, some jobs, all home mortgages and so much more.

So start simple. Get a student card, or a basic cash back card if you’re a recent grad (check Discover’s it cards, for starters, or your bank’s credit card offerings). Use your credit card for some of your everyday charges, and pay off your bill every month and on time. You’ll build your credit, you won’t go into debt, and you’ll be earning some cash back in the process.

Another bonus: The perks, which vary by card, are nice extras that can save you money, such as when you buy something and discover the price dropped two weeks later, the rental counter agent wants you to pay for car insurance, or you run out of gas and could use a little roadside assistance.

Use your card with care, and you’ll be building your credit score to help you get a car, home or your dream job. Most card issuers now offer free credit scores and trackers to make it easy to keep tabs on your credit.

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Liran Amrany Debitize
Debitize is a new personal finance application that lets consumers use a credit card like a debit card so they can build credit and earn rewards without the dangers of interest and late fees. With the new CARD Act rules, college students may need a cosigner to get a credit card, but parents should encourage this as well and help make sure they are using them responsibly.

Credit cards the easiest, fastest, and only free way to build your credit. A good chunk of your credit score depends on the age of your credit accounts, so opening up a credit card early and keeping it indefinitely will really help you build credit over time. Just make sure your first card is one with no annual fee.

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For students or recent grads looking to build their credit score, first they should understand what makes up a credit score:

– 35% of your credit score is determined by your payment history

– 30% of your credit score is determined by how much you owe

– All your different accounts are considered to track your payment history. Think credit cards, loans, car payments, mortgage payments, etc.
– No two late payments are alike. Someone who is a month late on a large debt will be evaluated differently than someone who is two days late on a small debt. The bureau considers how late you were, how much you owed, when this late payment was, and how many you’ve had overall.

– 15% of your credit score is determined by the length of your credit history. They check the age of all of your accounts – the oldest, the newest, and the average age of them all.

– 10% of your credit score is determined by the types of credit in use. Student loans, auto loans, and credit cards are all different types of credit. Having experience with a variety of credit types makes you more attractive to lenders.

– 10% of your credit score is determined by how recently you’ve opened a credit line. If you suddenly apply for a bunch of cards, rack up balances, and apply for more credit, it’s a red flag. The bureau wonders why you suddenly need all this money and what you’re going to do about paying it back.

One of the best things someone who is seeking to build credit should consider is getting a secured credit card. A secured credit card is an account for which the user puts down money as collateral that becomes the credit line for the account. They are generally designed for people trying to build their credit for the first time along with people who are trying to rebuild their credit after a delinquency. They can be helpful because like an unsecured card, they appear on your credit report and if paid off monthly can significantly improve your score. The bank does not have to take the risk that you won’t pay back the debt because you have already given them collateral, which can also improve credit card habits for people who haven’t used them before. This is generally why they are offered to students who have no credit experience to jumpstart their score.

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David Bakke Money Crashers

One great reason to begin building credit early on is that the length of your credit history has an impact on your score. So the sooner you start, the better off you’ll be. Getting used to credit cards and how they work as a college student or recent graduate is also good because it builds the foundation for a healthy financial life, if done properly.

In order to actually build your credit, pay all of your monthly bills on time. And if you commit to a strategy of never spending more than you make, you’ll never have to worry about carrying credit card balances, which negatively impact your score. Use your credit cards in this fashion generally speaking – put a few minor purchases on them each month and make sure you pay the bill on time and in full each month. That’s the best strategy for maintaining control over your credit score and overall financial picture.