When you're in college, there's a lot of new information and experiences coming at you on a daily basis. Maybe it's your first time living away from home, managing your time to balance school, a social life and perhaps a job, and generally learning how to "adult."
You probably have dreams about where you want to live, the car you'll drive, the career you'll pursue, the travelling you'll do, and the general lifestyle you'll lead once you've got that diploma in hand.
While there's no cheatsheet that gives you all the answers in life, the good news is that you can get a headstart on building credit habits that will open doors after you graduate, and even while you're still in school.
To go after your dreams, you need to build a positive credit history to demonstrate to lenders, creditors, landlords, insurers and even employers that you can reliably and capably manage your finances over time. And you will be graded, in a sense: credit scores normally range from 300 to 850, with a score of 700+ considered "good," and 650 or less as needing work. (Most scores, according to Experian, are in the 600-750 range.)
But there's a Catch-22 of Credit: it usually takes credit to get credit.
Back to that newfound independence: some of what you're doing now, including managing your day-to-day finances, paying for room and board, and financing your education with student loans can actually help you build a positive credit score. If your parents are giving you a helping hand, they'll be happy to know they can also support you in building your credit at the same time.
Here's how you can break the Catch-22 of Credit and fast-track that aforementioned bright future:
1. Get credit for paying rent.
If you're living in an off-campus apartment, you can start building credit by simply paying your rent on time and making sure it's reported to the three main credit bureaus (Experian, TransUnion and Equifax).
Think that you're already getting credit for this? Think again — most property managers don't share your information with the credit bureaus. Check with them to see if they do, but if not, you still have options for getting your rent reported.
The way you do this is to use an accredited reporting service, like RentTrack, to do the reporting. Even if your parents are helping out with the rent, as long as you're the one with the RentTrack account, you'll be building your credit history.
You get extra credit if you noticed using rent payments is a smart way to bolster your credit score without incurring debt, using money you'd be spending anyways.
2. Open a student credit card.
Once upon a time, it was easy for students to get credit cards -- because they were an easy target for banks and other creditors to reel younger cardholders in with enticing offers to sign-up, like free pizza or swag.
Although these credit cards seemed like "free money," many people were shocked to find that over time their debt was compounded by fees and high interest rates — a score for the banks, but a serious problem for young, inexperienced credit card holders. Many students also got into trouble by opening too many credit cards in a short amount of time, which is a bad habit because it has a significant negative impact on your credit score.
This may sound foreign to you if you were just a kid during the financial crash of 2008, and that's because it all changed in 2009 with the Credit Card Act (2009). Today everyone under the age of 21 now must have a co-signer, such as a parent or other responsible party, or show proof of independent income or assets if they want to get approved for a card in their own name.
If you have a co-signer, that person takes on joint liability for any card debts you incur. You also won't be able to authorize any credit limit increases without that co-signer's consent. While this may sound like a lot of hoops to go through, it gives you an opportunity to think about what you're doing with your credit card, and hopefully have a conversation with your co-signer about debt and money management. The key is to be careful about only spending small amounts you can pay in full and on time on a monthly basis, and to only use your credit card in a emergency situations for large expenses.
There are many student credit cards to choose from, which you can qualify for with no credit history. Look for cards with low APRs, good benefits like points, and higher approval odds. If you don't have your own income or assets, do your homework and present the options to your folks so they can help you start building your credit history with a student credit card.
3. Become an authorized user on your parents' credit card account.
While opening a credit card in your own name is the most direct way to be sure that credit account factors into your history, another option is to become an authorized user on one of your parents' credit card accounts. This simply means that you can use their card in your name to make purchases and otherwise use it as if were your own. This gives your parents the ability to help guide you in proper handling of a credit card account, as they'll see your charges — and payments. Legally the primary card holder (your mom or dad) is ultimately responsible for paying the card, but most credit bureaus will factor that credit card on your history, too.
Caveat: Only do this if your parents have good credit. Otherwise, it won't help you, and it could potentially hurt your credit score.
4. Your student loans are building your credit history, so manage them wisely.
Nowadays, the debt that most recent grads are dealing with isn't from credit cards — it's from student debt.
If you're using a federal student loans to pay for your education, you have already taken advantage of one of the few times a credit check isn't required to get a loan. (Private student loans, on the other hand, do require a credit check.) Either way, repaying those loans will be a critical part of your credit history. There's usually only a six-month grace period after graduation before you have to start paying off your student loans, and you could easily miss that first payment and damage your credit score right out the gates if you're not careful.
Though you don't have to start paying off your student loans while you're still in school, you can begin saving money and sticking to a budget to prepare yourself for that expense. And if you have drive and discipline, you may consider making small monthly payments on your loans of just $10-$20, just to get in the habit.
The good credit score you build today will help you better manage your student loan payments, and even refinance them, tomorrow.
And in fact, even thinking about establishing credit while you're in college gets you an A for achievement. The basics are you need to worry about right now, including paying bills on time, keeping your expenses under control and using credit wisely. Credit, like life, isn't graded on a curve. But by taking advantage of a few of these tricks, you'll start post-grad life with your best foot forward.
