College is an important time for learning critical life skills. Obviously, you’re in school to learn from your professors, master some marketable talents and depart with a degree that you can actually use. But if you choose to, you can depart from college with so much more than a degree. You can depart from college with a good credit rating. Speaking with candor, this may be just as valuable as a degree.
But how, as a college student, can you begin to cultivate a good credit rating? Well, there are a few helpful strategies that you can implement even if you are the stereotypical cash-strapped college kid.
By the way, if you’re looking for other ways to manage your money while you’re paying for a college education, find out how to get student discounts at stores, restaurants, and more.
Otherwise, read on for 10 ways you can build good credit before graduating from college.
1. Understand How Credit Works and Why It Matters
Before you can begin to build credit, start with a basic primer on exactly what it is and why it matters. In the simplest terms, your credit is the degree of risk you represent to potential lenders. This level of risk will determine your eligibility for certain loans, your interest rate for repayment of these loans, and your spending limit on credit card offers.
Your credit is represented as a FICO score, which, according to credit rating agency Experian, “generally ranges between 300 and 850. A good credit score is 670 to 739 on the FICO® Score range, while a credit score of 661 to 780 is good on the VantageScore® range.”
A better credit score will improve your access to loans, favorable credit card offers, and lower interest rates. A lower credit score can lead to far higher interest rates and may even prevent you from receiving certain loans including mortgages and auto loans. In other words, there’s a lot at stake when it comes to your credit score.
This credit score is based on your history of borrowing and repayment, which includes repayment of loans, credit card balances, bills, and other debts. Late payments, delinquent accounts, and accounts that have been sent to collections can lead to negative marks on your credit report and, consequently, can lower your credit score. Carrying high balances can also lower your credit score by raising what is called your credit usage ratio.
On the other hand, responsible borrowing and diligent repayment can help build and improve your credit score. Of course, these are just the basics. Before you dive into credit card usage, make sure you understand the implications of your credit limit, annual APR, and any fees or rewards associated with a new credit card offer.
2. Start Repaying Your Student Loans in School
Once you understand how credit works, there are actually a few steps you may be able to take to build your credit before you even glance at a credit card offer. If you’re like most college students, you’ve taken out one or several loans to pay for your education. In most cases, you will not be required to begin repayment on this loan until after you’ve completed your education. However, if you have unsubsidized or private loans, you will be accruing interest on your principal balance even during this grace period.
But there is a silver lining. If you have the means, you can actually begin building credit by starting your loan repayment plan early. Granted, this is only an option for those with the extra funds. Certainly, this isn’t the case for every college student. But Saving For College notes that for a modest cost—perhaps no more than $25 a month—you can make meaningful gains on your credit score by beginning to repay your loan during the typical grace period that coincides with your education. Of course, the added benefit here is that you may be able to make a dent in your overall student loan debt before you’re even obligated to begin repayment.
3. Make Your Rent Payments Work for You
There’s another potential path to building your credit without getting a credit card or even spending beyond your existing budget. If you’re living off campus, you’re already paying rent. You may be able to make that rent work for you, even rent that you’ve previously paid. Saving For College notes that “Businesses like PayLease, Rent Track and Rental Kharma help you add previous and current rent payments to your credit report to build your payment history.” As long as you’re already dropping a bundle each month for housing, make sure it’s helping to establish your long-term credit outlook.
4. Become an Authorized User on a Parent’s Account
Once you’ve taken the steps above, you’re ready to get your own credit card…sort of. According to the Credit Card Act of 2009, says Saving For College, if you’re a student under the age of 21, you actually aren’t allowed to get a credit card by yourself barring some exceptions. This means you’ll need a little support to get the credit ball rolling.
If you’re ready to dip a toe into personal credit building responsibility, start by asking your parents to add you to their credit card account. As a user, you would have access to your own credit card. However, you would be beholden to the primary user’s credit limit, and it would still fall upon the primary user (i.e. your parent or guardian) to make payments. Ideally, if you use this credit card, you would make an arrangement with your parents to pay for your portion of the balance each month.
But here’s the real beauty of becoming an authorized user. You don’t actually have to spend at all to begin building credit. According to Bankrate, “you don’t actually have to use the card at all to reap the benefits of activity on the account towards your credit score.” This means your parents can actually help you begin building credit without taking on the risk or liability of your spending. That’s good for everybody involved.
5. Get a Credit Card with a Cosigner
As noted above, students under 21 are generally not eligible to sign up for a credit card on their own. However, “there are exceptions for students who demonstrate an independent means for repaying the debt or have a cosigner. If you’re in school and not working, it’s unlikely you’ll be able to qualify for a credit card unless you get a cosigner.”
If your parent or guardian is willing to cosign for a credit card, you could have your own credit card, in your name, backed by your co-signer’s credit history. This could give you access to better terms—like a higher spending limit and lower APR—than you would qualify with your more limited credit spending background.
The major caveat here is that while you’ll be responsible for managing and repaying this credit card, your cosigner is liable for any failure to do so. Late payments and delinquency can not only derail your efforts at building good credit but can also damage the existing credit rating of your cosigner. All parties involved should know the risks and have a plan for mitigating these risks.
6. Get a Secured Credit Card
There is another way to mitigate the risk of credit spending while still making gains on your credit rating. For many families of college-bound students, a secured credit card is a great way to teach responsible credit card usage and build credit with limited consequences.
According to Saving For College, “A secured card is a credit card where you deposit your own money as security for your purchases. Your credit limit is equal to the amount of your deposit. A secured card is a good way for someone with no credit or bad credit to build a good credit history. Your monthly activity on the secured card is shared with the credit bureaus, so if you’re making regular payments this could help your credit.”
In essence, you can think of a secured credit card as a debit card with the built-in capacity to help you improve your credit rating. For parents who wish to give their young students some basic training in credit card usage, this is a great practice tool.
7. Spend Responsibly
No matter what kind of credit card you’re using, responsible spending should come first and foremost. Of course, the only way to build credit with a credit card is to spend. But that doesn’t mean you should use your credit card to spend indiscriminately. At the beginning of your credit-building journey, designate your first credit card only for certain purchases.
Naturally, a credit card is good to keep on hand in case of emergencies. But what about everyday use? Consider looking at the rewards programs affiliated with your card. If you get points for using your credit card to buy gas, for instance, this might be a great place to start. Other rewards might include airline miles, restaurant discounts, and rebates for shopping at certain retail chains.
Use these rewards to direct your initial spending, but keep your usage modest and limited.
8. Pay Your Balance In Full Every Month
If you’re not entirely sure how to moderate your credit card spending, this is the perfect way to determine your threshold. Spend only what you can pay right away. The only way to avoid interest charges on your credit card spending is to pay your balance in full, every single month. Keeping a zero balance on your credit card will both improve your credit rating and insulate you from paying anything beyond the initial amount you’ve spent. So consider this tip in tandem with the tip above. Don’t spend more in a given month than you can afford to repay.
Of course, this may not always be possible. As noted above, your credit card may also be an important last resort when you face an emergency. In this case, always pay above the minimum amount due each month, and do your best to pay down your balance quickly. The sooner you can lower this balance, the less interest you’ll pay in the long run.
9. Sign Up for Free Credit Monitoring
Responsible credit card usage is important, but what if you’re not the one using your credit card? Credit card fraud is a real and prevalent issue. If you fall victim to this crime, it could damage your credit rating and saddle you with a mess of penalties, fees, and bureaucratic hassles. Make sure you keep an eye on your credit spending by regularly monitoring both your credit report and the FICO credit scores generated by the three credit rating agencies—Experian, Equifax, and TransUnion.
According to MidPenn Bank, “You have the right to check and review your credit to verify the information is accurate and error-free. You can review your report from each of the three agencies without charge, once per year at AnnualCreditReport. Others who might review your credit include lenders, potential employers and potential landlords.”
This gives you a chance to red flag any spending or accounts that don’t look familiar. And when you sign up with a free credit monitoring service, you’ll also receive alerts when unusual activity occurs in your name.
Just as importantly, you’ll have the chance to see exactly how your spending and payment habits can impact your credit score in real time. This is a great way to gain a fuller understanding of how credit works and how you can nurture a good credit score.
10. Get a Student-Specific Credit Card Offer
Now that you know the basics, it’s time to start looking at credit card offers. Be sure that you do so while taking full advantage of your student status. Look for favorable credit card offers with limited fees and rewards specific to student life. A student credit card may include rewards and discounts for spending at bookstores, on computers, for travel to Spring Break destinations and more.
If you’re ready to begin building your own credit today, check out our look at the Best Credit Cards for College Students.