How to Build a Credit Score as a College Student
A FICO credit score is built upon several different categories. By knowing what a FICO score is, you can best figure out how to build your credit score quickly. One quick method involves someone with an established credit line being willing to authorize a new-to-credit person be added to already-established credit cards. If this simple option is not available, building credit can still be relatively quick and easy.
For students entering college, it’s a great time to work on building credit. By following some of the tips below and sticking with good money management practices, recent college graduates will find themselves with a healthy credit score. This solid credit score will then allow them to rent apartments without a co-signer and get more favorable interest rates on loans. Evaluate and select which of the following tips will work best for your current circumstances.
Start with the Right Type of Card
Credit cards are one of the primary go-to methods in credit score building. The ability to wisely use and pay off the balance each month helps to show lenders your financial responsibility and establishes what amount the borrower should be able to pay back reliably. In addition, a credit card helps the borrower establish good credit borrowing habits when using a starter credit card.
While it’s very easy to sign-up for any credit card, one with a low APR and no annual fees is ideal for the first-time user. Check out DECU’s credit card options to compare and choose the best for you. We are here to help you with any questions or conerns that you may have regarding your DECU-issued credit card. Remember, you are part of the DECU Family and we are always here to assist in any way we can.
Request a Credit Line Increase
Once you have a credit card and have demonstrated consistently good money habits, such as good credit utilization rate, no missed payments, and have paid off the credit card balance every month, it may be time to request a credit line increase.
For example, most starter credit cards begin with a $500 credit limit. Depending upon the card, it might automatically increase after a certain period of time or you may have to request a larger credit line. Increasing the amount of credit available to you at any one time can help to balance other outstanding debts, such as student loans, auto loans, mortgages, or other credit cards. The rate of credit utilization lowers when a credit line increases, and no new debts are added, helping to boost a person’s credit score.
Review Your Credit Utilization Rate
Requesting and receiving a credit line increase can be dictated by making sure you have a good utilization rate of debt versus total available credit. As mentioned, increasing one line of credit can help level other debts, but good practice for credit cards is to make sure you stay under a 20% credit line usage rate each month.
For example, a 20% utilization rate for a credit card with a $500 credit limit would be $100. With a credit line increase, that 20% utilization amount also rises. However, always make sure that the credit utilization rate fits within your budget. An increased credit line doesn’t do a credit score any favors if the available credit turns into debt.
Remember, just because you have a credit card doesn’t mean you have to use the 20% credit utilization amount every month; that utilization number is just a general guide to help make sure you do not overspend.
Opening Different Types of Credit
If you didn’t have a car in high school, college may be the perfect time to get your first car. Of course, this decision is dependent upon how far home and school is, what parking is like at college, and if you are interested in making a monthly car payment.
If you do decide that a car is a necessary expense, make sure to stay within budget and that the monthly payment is affordable. DECU offers great rates for auto loans, and should be one of your first stops when checking out car loans.
Additionally, if you are taking out loans for college, make sure to stay ahead of interest rates and pay off a small portion of the balance each month, even if no payment is due.
Opening Multiple Credit Cards
One way to increase your credit score is to open a new credit card, thereby increasing the total credit line. This step should only be undertaken by responsible credit card users, and not seen as a method to make ends meet or maintain one’s lifestyle. Carrying debt from month-to-month on basic costs of living is a sure-fire way to find yourself swimming in debt suddenly. For college students, a new credit card can be an incredibly alluring way to finance a great spring trip or an entirely new wardrobe; this is why multiple credit cards should only be used if you know you can handle the purchasing and payment responsibility that go with them.
You should only open an additional credit card if there’s a better benefit offered that fits your life’s needs and that benefit is both immediate and long-term. Some examples may include cashback points or money, airline miles, no fees, included trip insurance, or lowered APR rates. Plus, while you can close one credit card to open another, always make sure to keep your longest line of credit open so it can help balance your credit score. The most important aspect to consider is this: can you afford the payments that come with using an additional credit card and are you disciplined enough not to overextend yourself?
Review Your Credit Score Annually (At Least)
In a day and age where hacking and identity theft is a valid concern, making sure to review your credit report (at least annually) is a great way to stay on top of your credit score. While you’re not necessarily working to build credit, reviewing your credit score through the free credit reports available from TransUnion, Equifax, or Experian is a way to maintain the good credit one has. Not only can these reports reveal any discrepancies, but they help to provide an overall snapshot of one’s credit score health and any outstanding debts.
For a new college student, managing and building a credit score can seem overwhelming. However, by following some of these tips and being disciplined in making at least minimum payments on time, students will find their credit score will not only be established, but likely will have dramatically improved by the time they graduate.