Whether you’re in college or just graduating, chances are you don’t have much credit history. And that’s not a bad thing. You haven’t needed credit up to this point, and this is the time when most people start worrying about things like credit scores and credit cards.
But now that you’re in your 20s, it’s time to think about building credit. What this doesn’t mean is applying for all 50 of the credit card offers you get in the mail this week. Avoid that, and take these steps instead:
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Why Worry About Credit?
Your credit score has more to do with your life in general than you might think. Sure, your parents probably co-signed for your student loans, but you don’t want mom and dad to have to co-sign for you forever, do you?
Besides, avoiding long-term reliance on your parents’ credit and building a good credit history helps you in other ways. Consider:
- Building a credit history allows you to get credit when you need it, such as when you buy a car or a home.
- Landlords will run credit checks before renting to you to ensure you’re financially responsible.
- Potential employers may pull a credit report, using it to gauge your personal responsibility.
- A high credit score will save you money by getting you lower interest rates on the loans you take out.
What Goes Into Your Credit Score
The first step to building credit is to understand what goes into your credit score. There are a lot of myths out there about what does or does not affect your credit score. (Like the myth that your income has something to do with your credit score. It doesn’t.)
The FICO score, the most commonly used credit scoring model, uses a weighted model. That means that some components are more important than others. The breakdown of a FICO score is:
- 35 percent payment history
- 30 percent amounts owed
- 15 percent length of credit history
- 10 percent new credit
- 10 percent types of credit used
In short, this means that paying debts on time is the most important thing you can do to keep your credit score up. Next is to keep your balances low compared with your credit limits. (i.e., you don’t want to carry a balance of more than 50 percent of a credit card’s limit, and lower is better.)
Your credit history will naturally lengthen with time, and you can avoid dings on your credit by not applying for new credit when you don’t need it. In other words, don’t take every store credit card offer that comes your way.
With that said, you still need some specific steps to building your credit. Here’s what you can do to begin building your credit.
Student Loans Help Build Credit
Because federal student loans don’t require a credit check, you can get these loans based on financial need without any credit history. And if you start paying them back promptly after graduation, they’re also a great way to begin building your credit history.
Whether you consolidate your student loans or not, paying on time will help build your credit. Remember that even one late payment can ding your credit score, so make those payments a priority.
If you don’t have enough money to make payments, look into alternative repayment options before you miss a payment. Talk to your lender about which option will work best for your needs.
Your first choice for student loans should be federal loans. They not only often provide the lowest rates, but they also don’t require an active student to qualify based on credit or income. But if federal loans are insufficient, and they often are, you’ll need to look into private student loans.
One of the best ways to do that is through an online student loan marketplace, like Credible. You can complete a single online application, and get quotes and pre-approvals from multiple lenders. That will give you the best opportunity for both loan approval and low rates.
And once you’ve finish school, and begin repaying your loans, one of the best ways to improve your credit score is to do a consolidation or a refinance. By rolling several student loans into a single loan, you’ll reduce the number of loans with outstanding balances. That will have a positive impact on your credit score. And when you’re ready to do that, Credible can help you there as well.
Consider a Student Credit Card
While you certainly don’t want to graduate with student loan debt and credit card debt, using a student credit card wisely is a great way to quickly build your credit. Having a revolving line of credit, such as a credit card, adds to your account mix and gives you more fuel to feed your rising credit score.
The keys are to choose the right student credit card for your needs and to make all your payments on time. Know all the details of your credit card, including late fees, balance transfer fees and APR, and stay on top of your billing statements.
You can really give your burgeoning credit score a boost by keeping your credit card balance low or even zero. Use the card for a few purchases throughout the month and pay it off promptly. In this way, you won’t pay any interest and you’ll boost the “amounts owed” portion of your credit score.
Paying Rent May Help
Chances are that you’re not going to move straight from college into homeownership. And because you’re still building your credit score, that’s not a bad thing.
But why not make what you have work for you? You can do this by trying to have your rent reported in your credit score. Two credit reporting bureaus, TransUnion and Experian, have a way for renters to include on-time payments in their credit reports.
As long as you have a good history of on-time rent payments, those payments can help boost your credit score. Even if you’re still in college and paying rent (in your own name, not your parents’), you may be able to add your on-time payments to your credit report to boost your score.
Pay Your Bills On Time
I can’t stress enough how important this is to building and maintaining good credit. A single late payment can wreck your credit score and take months to come back from.
Stay On Top of Your Credit Score
Finally, as you’re building your credit score, take time to manage it. Some places, like myFICO.com, have paid services that allow you to keep a constant check on your credit score. If you’re broke, you don’t have to pay monthly, but you should check your credit report every few months and your actual score a couple of times a year.
Checking your credit report, in particular, can help you spot reporting mistakes, which are very common, before they cause serious damage to your credit.
Now that you know the basics of building your credit score while in college, check out these resources for further information:
AnnualCreditReport.com: You can use this site to obtain a free copy of your credit report. You’re legally entitled to one free copy per reporting bureau per year.
MyMoney.Gov: This is a resource site with all sorts of information on budgeting, mortgages and, of course, credit and debt.
Information on Credit Bureaus and Credit Scoring: Learn about the major credit bureaus and the laws of credit scoring from a trustworthy government site.
Fair and Accurate Credit Transactions Act: Learn more about your legal rights as a consumer from this FDIC page.
Check Your FICO Score: Use this site to check your official FICO score for free.
myFICO.com’s Credit Basics: Learn about the basics of credit reporting and credit scores from myFICO.