When you first head to college you’re going to hear from many well wishers: your family, your friends, and eventually the credit card companies. Don’t lament it. That’s a good thing, because it’s time for you to start building your credit rating.
You’ve got plenty of time while you are a college student to start building a great credit profile. Here are some of the things you should keep in mind about starting your credit history and maintaining good credit.
Why You Need Credit
First, let’s explore why you’ll need a credit rating. Those needs are mainly going to come later in life when you’re done with school and out in the world making a name for yourself.
For example, after college is in your rear-view mirror and you’ve been gainfully employed for while, hopefully you’ll have saved up some money for a down payment on a home. When you make an offer to purchase that home, it’s very likely you’ll need to take out a mortgage to supplement whatever down payment you are going to make.
The bank or other loan company you’re going to ask to help is going to assess your presumed ability to repay the mortgage. They do that by asking you to provide some basic information about your current and prior employment, your education, and they also look at your credit score.
Understanding Your Credit Score
The main credit score is the FICO® score, developed by Fair Isaac Company, which rebranded as FICO in 2009. It rates everyone on a scale from 300 to 850.
You can think of these scores as being somewhat like the SAT, with a slightly different numeric range. If we had to assign grades to FICO scores, we’d say scores of 760 or higher earn an A, while scores of 725 to 759 get a B, 660 to 724 merit a C. Below that, scores between 560 and 659 are poor, like a D, and anything lower than 560 is basically an F. A score below 560 indicates a very high risk to anyone thinking of lending that person money.
Most lenders will consider applicants for a loan who have a FICO score of 660 or higher. Some lenders will consider those with lower FICO scores, but if that’s you then you need to be prepared to be declined by some lenders and face higher interest rate payments if you do get approved. The higher interest rate offsets some of the risk the lender perceives when offering money to someone with a poor FICO score.
The specific details of what goes into the FICO algorithm are proprietary, but many people have studied credit profiles and understand the basics of what makes a FICO score go up or down. Here are the most important factors:
- History of payments
- Length of credit history
- Amount(s) owed
- Credit types
- New credit
Lenders will look at how timely you’ve been in paying back loans before. If you don’t have any history of paying back loans, that’s not going to help you or your FICO score.
Of course, if you have a history of not paying back loans, that’s not going to help you or your FICO score either. We’ll come back to timely payments later.
How You Can Start to Get Credit
As a college student, you have a few good ways to obtain credit, start your credit history, and seek to improve that credit profile over time. Your first step is to understand how to manage credit cards before you get one. Your second step, if you’ve not already done so, is to open a new credit card.
The most important point to keep in mind on managing credit cards is that you’ll want to ensure you can and do pay the balance in full each month. There is no real benefit to you when starting your financial career in keeping a balance from month to month and paying interest on the money the credit card company has loaned you.
When the bill comes each month in the mail or electronically, have a routine of paying that bill the same day. To borrow Nike’s phrase: Just do it.
With a good routine in place and the maturity to be able to handle a credit card, you should do your homework about which credit cards are better than others. Not all credit cards are created equal.
Choosing the Right Credit Card
Not long ago, U.S. News and World Report did a study on credit cards for college students. The magazine reported there were several good options for students, including some credit cards that offered zero percent annual interest rates on purchases for the first 9 to 15 months.
That sounds great, but remember your goal in establishing and maintaining good credit is not to carry a balance from month to month. Having a balance at zero percent interest sounds terrific, but if you don’t pay it off when the grace period closes, you’re going to incur interest payments that may be as high as 19.8 percent.
Therefore, the best options for students are credit cards that have no annual fee, regardless of the interest rate.
Annual credit card fees are usually fairly low, for example, under $60. You might be tempted to ignore them as a criterion for choosing one card over another, but why pay them when you don’t need to? You’d probably much rather spend that annual fee on something else or stash it away in savings for a rainy day.
If you have trouble qualifying for a credit card, a good place to inquire is with a local credit union. Each credit union is defined by membership criteria. But often the criteria include simply being part of a local community.
Credit unions are governed by their members and are non-profit cooperatives, unlike typical finance corporations. That means their rules for lending may be more tailored to the needs of their members.
Just as an example, the San Diego County Credit Union offers a Visa® platinum card that has no annual fee and interest rates between 9.99 percent and 19.99 percent, depending on creditworthiness. Again, the interest rate isn’t important because you are only going to purchase things that you can pay off at the end of the month. What’s important is that there’s no annual fee, and you may find a credit union is more amenable to helping you.
What If You’re Declined for a Credit Card?
If you explore the options for opening a standard credit card and find your applications are declined, you can still make progress in establishing and maintaining a credit history. You just need to obtain a secured credit card instead of the traditional card.
A secured card is one where you put up some amount of money ahead of time and then the credit card issuing company will give you a line of credit on a card for that same amount. Typical lines of credit on secured cards start in the $200 to $500 range. Bankrate.com offers a list of secured credit card providers.
If you find you’re declined because you are too young to have a credit card, see if you can be added to one of your parents’ credit cards or have them co-sign your application. But keep in mind this isn’t something every parent will feel comfortable doing.
It’s essentially the same as their taking responsibility for your spending should you decide not to pay your bills. They are also taking the risk of hurting their own credit rating in the process. If your parents “decline you,” don’t take it personally. You’ll have plenty of time to get going on your credit rating as you get a little older.
How You Can Maintain Good Credit
Once you are in a position to be establishing your credit by using your credit card for regular purchases and paying off your card at the end of each month, it’s important to ensure you maintain good credit and work to have your score increase over time. Here are five things you should consider when seeking to increase your FICO score.
- Don’t open a lot of new credit accounts
- Don’t close credit accounts, unless you feel you cannot handle them
- Pay bills on time
- Take care of any late payments as soon as possible
- Pay off your debt
There are other factors too, but these are the most obvious and the things you are most likely to have direct control over.
You might think if having one credit card is good for your credit then having more must be better. That’s not the case. It’s reasonable to think about having a couple of different types of credit cards. For example, perhaps a vendor might not take Discover® but might take Visa or MasterCard®. But your FICO score will not be impacted positively by opening a lot of credit cards.
Similarly, your FICO score won’t be impacted positively by closing cards either, and there’s some indication your score may go down a little bit by doing this. So don’t be concerned with how many accounts you have.
Instead, be concerned with your behavior of paying off the balances every month, in full, on time, consistently. If you happen to be late on a payment sometime, take care of that as soon as you can, and if you must carry a debt on your credit card, pay it down as quickly and consistently as possible.
Knowing Your Credit History
Keeping up consistently good credit card behavior isn’t where your responsibility ends. You also have the responsibility to know what your credit history looks like to potential lenders.
Lenders use one or more of the three national credit bureaus to examine your credit history. These bureaus are Equifax, Experian, and TransUnion. Any time you have a credit action on your accounts, it will be reported to these companies. If you fail to pay your credit cards, rest assured every credit bureau will hear about it.
That said, sometimes errors do creep into these reports. You may find you’ve closed an account, but it’s still listed as active on one bureau’s report and not on another. Lenders don’t always consistently report to every bureau, and they also don’t always report correct information.
Sadly, it’s also the case you may become a victim of identity fraud. In that case, you’ll need to get to work fixing whatever damage has been done erroneously to your credit report.
That means it’s your job to keep tabs on your credit history with each credit bureau. You can do that by requesting a report from them directly.
It’s federal law that you can obtain a free copy of your credit report each year from each of the three national credit bureaus. So one good strategy is to mark your calendar for January, May, and September, and submit your request to each bureau in turn. You can do that by going to www.annualcreditreport.com.
By the way, you can also help protect yourself from identify theft by using services from LifeLock, Identity Guard, and other specialized services. These companies offer identify theft insurance, recovery, and fraud detection, as well as some other features, but you do have to pay for their services. Do your research to see if signing up with one of these companies is right for you.
Establishing a Lifelong Habit of Good Credit
As a college student, you might have an opportunity to study rocket science, but starting and maintaining good credit really isn’t rocket science. Most of it is common sense and showing you have the maturity to handle financial responsibility.
Like it or not, it really helps to have good credit. It literally helps you get around in the world. You almost always need credit cards to rent a hotel room, rent a car, or make a plane reservation. Furthermore, if you want to purchase something to eat on an airplane, you’re going to have a tough time finding a flight attendant who’ll take cash.
Getting started with your first credit card and then handling it responsibly is an important step to putting yourself in position to leverage your good credit later in life when you want to secure a car loan, a home mortgage, or perhaps start a business with a line of credit. It’s important your first steps be in the right direction.
The most common trouble college students have with credit cards is they don’t know what they have and don’t appreciate how to use them to their later advantage. One recent survey showed 70 percent of US college students have credit cards. Of those, 70 percent or more did not know their late payment charges or over-balance-limit fees, with more than 90 percent carrying monthly debt.
It’s important you not follow in those footsteps. Follow the guidelines offered here and you’ll be in a much better position than most of your college colleagues. Even better, you can share this knowledge with them and help them succeed as well.