How to Build Credit Responsibly in College
Last year, HackCollege’s Dominique Jackson gave some great advice on avoiding the credit pitfalls that often trap unsuspecting college students. This year, I want to reopen that topic and let you know how to build credit responsibly while still avoiding the pitfalls that lead to early debt and financial hardships.
Credit Follows You Everywhere
The most important thing to know about credit is that it follows you everywhere. Want to rent an apartment? Credit check. Buy an iPhone with a service contract? Credit check. Applying for a job? Some employers may run a credit check.
The point is, credit is your financial reputation.
But unlike your actual reputation, you can’t just move away or redeem yourself simply. Credit inquiries often take years to be scrubbed from your record, if they’re ever removed at all. For instance, hard credit inquires–typically run by banks and other financial lenders–can follow you for two or more years. A late payment or a bankruptcy can take up to ten years to be fully removed from your credit report.
Steps to Building Credit Responsibly
There’s no denying that credit–or “free money,” as it’s called by irresponsible people–is alluring. If you’re broke and want something, you can have it if you’ve got a credit card. Unfortunately, those will little experience managing finances (i.e. college students) don’t fully comprehend the consequences of misusing credit. Part of that is a lack of financial education leading up to adulthood, and part of that is a lack of personal responsibility.
If you’re looking to avoid these issues early, and still build valuable credit, here are a few tips to help you get started:
1. Understand That Credit is a Privilege
You don’t have a right to credit. If you misuse it, the privilege disappears. This can lead to the inability to get a car loan with reasonable financing, and may prevent you from owning a home. Those are life-altering consequences of bad credit usage.
It’s important to be of the mindset that credit is a wonderful, yet dangerous asset. You don’t have to be afraid of credit cards or loans, but educating yourself on good and bad credit decisions is the key.
2. Become an Authorized User on a Parent’s Credit Card
With an understanding and respect for credit, you’re ready to have access to a credit card and begin establishing a credit history. The easiest way to do this is to become an authorized user on someone else’s credit card. That person should be a parent, or a close relative, with excellent credit and a history of on-time payments.
You don’t want to be added to an account with a high balance (or no balance), as that could have a negative effect on your overall credit score. The best course of action is to be added to an account that is regularly used (under 30 percent utilization) with above minimum payments made on time each and every month. This will assure that the major credit bureaus associate you with good activity.
3. Apply for a Secured Credit Card
Once you’ve established a minimum of six months as an authorized user, the next step is to branch out on your own with a secured credit card. The difference between a secured and unsecured (real) credit card is a secured credit card requires you to pay a deposit equal to the credit limit you wish to receive.
For example, if I want a $500 credit limit I’ll need to give the credit card issuer $500 up front. From there, I can spend up to $500 on credit. However, I do have to pay that back, as it’s not taken out of my initial deposit. That simply acts as collateral in case I decide I don’t want to pay my bill. (Please don’t do this!)
With on-time, consistent payments the issuer will eventually increase your limit and you’ll have enough of a history to move up to an unsecured card.
Note: Be aware and read the fine print. The best secured credit cards have low fees (or none), report to all three major credit bureaus, and will refund your deposit. If an offer sounds fishy, be sure to run. Have someone you can talk with about offers before you apply.
4. Monitor Your Credit Score
I might be a bit obsessive about my credit score, as I use three different services to monitor all three of my credit scores. (Yes, each credit bureau has a different score. It’s stupid, but that’s credit.)
The easiest way to monitor your credit score is to sign up for Credit Karma. It’s a 100 percent free service that pulls its data from TransUnion (one of the three major credit bureaus). There’s no hidden fee or paid membership to unlock more than one feature, just free credit score monitoring.
5. Apply for a Real Credit Card (But Not Just Any Card)
Once you’ve established a year or more of responsible credit activity, you’re likely to qualify for a real credit card from a major issuer. Before you do so, however, it’s best to do your research on which cards are best for someone looking to establish credit. You want to shoot for something with no yearly fee and possibly rewards benefits.
Again, just as you do with a secured card, read the fine print. You don’t want surprises popping up after you submit an application and are approved.
Maintaining Responsible Usage
If you live by the following credit card rule without fail, you’ll maintain responsible credit usage and build a great history with each credit bureau: Never spend money you don’t have.
What this means is, if I’m not willing to take $500 out of my bank account to buy the latest Xbox, iPad, or other gadget, I have no business buying it in the first place.
Now, with all that in mind, go forth and establish credit!