One of the most exciting parts of growing up is becoming financially independent, but learning to do so can be challenging. Building a good credit history is a must: it will help you qualify for loans, auto insurance, rental applications, mobile phone plans, and even job prospects.
How to start? The Credit Card Act, most of which went into effect in 2010, has been a game changer by barring credit card issuers from approving anyone under the age of 21 without a guarantor or proof of independent income.
Basically, if you can’t prove to the issuer that you have the funds to pay your bills, you probably won’t get the card. But with or without a credit card, it still comes down to liability.
We asked several financial experts to explain how you can effectively build a good credit history. Here’s what they recommend:
1. Become an authorized user of the parent account
“I always advise parents when a student goes to college, if you’re not 100 percent sure they’re responsible for it, the first credit card a student should have is yours,” says Mike Sullivan, former director of education Take Charge America. , a Phoenix-based nonprofit financial education and consumer debt service organization.
Becoming an authorized user of a parent’s account can help build a good credit history through “matching” – a controversial practice that FICO – creator of the widely used credit score that bears his name – continues to allow family members.
If your parent has a good credit history, working together will improve your creditworthiness. It will also reduce the risks associated with having your own credit card, as the owner of the main account will be able to control spending.
Becoming an authorized user has long been a popular choice among students seeking good credit. But with the passage of the Credit Card Act, it may be the only choice for some.
2. Open your own credit card
If you can provide proof of income, it may be time to apply for a card in your name. But know this has changed since every college freshman’s dorm mailbox was overflowing with credit card offers and card issuers showered student applicants with free pizza and T-shirts.
In the post-Credit Card Act era, most issuers no longer require every college student to provide a credit card. Some no longer offer student tickets. Others have switched to using debit cards on campus.
Also know that when you receive a credit card that is wholly yours – without a guarantor – the responsibility for handling the card wisely and paying off your debts falls squarely on your shoulders.
3. Get the right credit card for you
Once you can get a regular card on your own, it’s important to remember that not all credit cards are the same, says Clarke Davis, former spokeswoman for CareOne Credit Counseling and officially known as the “Debt Diva.”
Before you apply for a credit card, you “should do some research to find the card with the biggest benefits—lower interest rate, no annual fees, reasonable credit limits, and a clear billing policy,” says Davis.
If you think you might have a balance, use a no-frills, low-interest credit card. A reward credit card may seem like a cooler deal, but the higher annual percentage rate (APR) and possible annual fee may not be worth it.
Sullivan says some students should consider starting with a retail card. Retail cards have fewer benefits and lower spending limits, but using this type of card and paying your bills regularly will create good credit.
Davis says those who cannot qualify for a retail card will need a secured credit card that is linked to a savings account. However, if you pay your bills responsibly and on time, you will eventually qualify for a regular credit card. This includes student credit cards that are directly targeted at consumers who may not have a significant history of borrowing.
4. Use a credit card for occasional small purchases.
Since responsible use of the card and timely payments will help you build a good credit history and also prevent the bank from closing your account due to inactivity, do not leave this plastic in your wallet.
“Getting a credit card means you start building a credit history and show on your credit report that you have one account and no late payments,” Sullivan says. “But if you really want to start a loan, you have to use a card.”
One way to do it? Consider making small recurring payments on your card: think about recurring expenses like groceries or a monthly subscription (like Netflix) that you won’t have trouble paying off at the end of the month.
5. Avoid large purchases, except in an emergency.
“A credit card is a valuable financial instrument. However, students must be able to manage their credit cards responsibly in order to benefit from this tool,” says Davis.
Keeping debt levels low ensures that you still have the majority of your line of credit available in the event of an emergency. So if you blow a tire or your mobile phone falls into the toilet, you can purchase a replacement without exceeding your credit limit.
6. Pay off the balance every month
When you first create good credit, do your best not to carry a card balance. Use it for purchases you can afford and pay off the balance at the end of each month. What if you can’t? You are living beyond your means and should not make these purchases.
“A student should only have a credit card if they have a job or some kind of income to support this financial instrument,” says Davis. If you have a balance, you must pay interest. Why pay a commission if you don’t have to?
7. Pay all other bills on time
Do you think only your credit card affects your credit? It used to be that way, Sullivan says, but “there are a lot of people now, including credit bureaus, that are developing alternative credit scores for undocumented people, including a lot of young people. They inspire confidence in utility bills.”
In 2018, one of the three largest US credit bureaus, Experian, launched Experian Boost. If you authorize Experian for your bank account, the platform will report your mobile phone and utility bills, which can give you more control over your credit history.
All three major credit bureaus also collect and list rent payments on credit reports. But it’s up to landlords to report this information, and not everyone does.
Sullivan says other fees, such as taxes and library fees, can also matter. He saw students whose credit was ruined because they didn’t pay a traffic ticket. Davies agrees: “Paying all your bills on time and on time – from your apartment rent to internet services – is very important.”
8. Don’t follow your friends
Just like you may need an adult guarantor to get your card approved, your friends under 21 will also need one. To help them get approved for the card, some of these friends may approach you to become a joint account holder. “I have found that some students force older students (fraternity brothers, etc.) to sign documents. It’s pretty dangerous,” Sullivan says.
Consumer protection experts have advice for you: don’t do it. This is because when a friend makes the mistake of taking on too much debt or missing payments to the bank, the surety can quickly see their own credit ruined.
“If your friend chooses not to pay, not only are you liable for all expenses, but you could ruin your credit,” says Edgar Dworsky, founder of ConsumerWorld.org.
Making your friend an authorized user also comes with risks. Again, their mistakes can hurt your credit, but – unlike when you sign up for a card – you can easily remove an authorized user from your account.
9. Don’t Apply for Multiple Credit Cards at the Same Time
Now that you have a loan in your own name, don’t go crazy. If you apply for too much credit in too short a period of time, your credit score will drop. If you have built up solid credit over several years, it will hurt you less.
“But if you’ve barely established credit and are applying for multiple cards, it can take your credit score down significantly,” Sullivan says.
How many cards should you have? “In order to prevent over-indebtedness on credit cards, it is better for consumers to have as few credit cards as possible. For most students, it’s ideal to have just one card,” says Davis.
10. Only use student loans for education expenses and pay on time
“Students should view their student loan as a great way to develop important habits that will help them build and maintain a good credit history,” says Davis. If you use them correctly, ie.
Sullivan says many young people take out student loans to buy cars and other non-educational items. “Manage your loans by borrowing only what you need to study. It lowers the balance,” says Sullivan. “When you finish school, be prepared to consolidate when appropriate.”
Davis and Sullivan agree that the real key to keeping your loans in good shape is making at least the minimum monthly payment and making it on time. Davis recommends paying more than the minimum to repay the loan faster, and stresses that payments must be received by the lender on or before the due date on the statement to keep the account in good condition.