10 ways students can build good credit
By Emily Starbuck Gerson
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One of the most exciting parts of growing up is becoming financially independent, but learning how to do so can be challenging. Building good credit is a must: It will help you qualify for loans, auto insurance, rental applications, cell phone plans, and can even affect whether you get a job. How do you get started? Put simply, it all comes down to being responsible.
So how do you get there? CreditCards.com asked two financial experts to explain in 10 steps how students can effectively build credit. Mike Sullivan is the director of education for Take Charge America, a Phoenix-based nonprofit financial education and consumer debt service organization that has helped many students. Clarky Davis is the "Debit Diva" for CareOne Credit Counseling, a debt relief service provider based in Columbia, Md.
1. Become an authorized user on your parents' account. "I always advise parents when the student is going off to college, unless you're 100 percent sure they're responsible, the first credit card that student should have is yours," Sullivan says. The teen should be an authorized user on the parent's account so the adult can monitor the child's spending. Additionally, this can help the student build credit via piggybacking, a controversial practice that FICO has decided to continue.
2. Open up your own credit card. Once you have shown responsibility with your parent's card, it's time to apply for your own. Sullivan says some students may have trouble qualifying for a regular credit card and should consider starting out with a retail card. Retail cards come with less benefits and lower spending limits, Davis says, but using this card and paying the bill regularly will build good credit. Davis says some students still may not have enough credit for a retail card and will need a secured credit card, which is attached to a savings account. If the student pays the bill responsibly and on time, he or she will eventually qualify for a regular credit card.
3. Get the right credit card for you. Once you are able to qualify for a regular card on your own, Davis says it's important to remember that not all credit cards are the same. Before a student applies for a credit card, "he or she must do some research to find a card with the most benefits -- a lower interest rate, no annual fees, reasonable credit limits and clear billing policies." If you think you might carry a balance, go with a no-frills, low-interest credit card. A rewards credit card may sound cooler, but the higher APR and possible annual fee won't be worth it.
4. Use the credit card for occasional purchases, even if you don't need to. Sure, merely having the credit card builds credit, but it won't do much just sitting in your wallet. If you're afraid of racking up debt, don't be. "Getting a credit card means you start a credit history and shows on your credit report that you have one account and no late payments," Sullivan says. "But if you really want to start credit, you have to use the card."
5. Use it for emergencies only at first. "A credit card is a valuable financial tool. However, students must be able to manage their credit card responsibly to benefit from using the tool," Davis says. While it is important for you to make purchases on the card in order to build credit and to learn responsibility with the card, Davis first suggests using the card in emergency situations -- for example, if your car tire blows out or if your cell phone falls in the toilet. Once you've become accustomed to the concept of paying the credit card bill, start using your card for several purchases each month, especially if you have the cash to cover it. That will give you a more robust credit history.
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Your keys to getting into the 700-plus credit score club
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Having a solid credit history with a credit score over 700 will open doors to money-saving opportunities -- from low-interest mortgages and loans to lower APR credit cards, better insurance rates and even jobs. Here are a slew of tips that can help get you and keep you in the 700-plus credit score club.
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6. Try to pay off your balance each month. When you are first building credit, do your best not to carry a balance on the card. Use the card only 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 shouldn't be making those purchases. "A student should only have a credit card if he or she has a job or some sort of income to support this financial tool," Davis says. If you carry a balance, you will owe interest fees. Why pay a fee if you don't have to?
7. Pay all your other bills on time. Think only your credit card affects your credit? That's how it used to be, says Sullivan, but "right now, there are a lot of folks, including credit bureaus, who are developing alternative credit scores for no-file people, which includes lots of young people. They're giving some credibility to utility payments." Sullivan says other dues, such as taxes and library fees, can make a difference. He has seen students whose credit has been ruined because they failed to pay a traffic fine. Davis agrees: "Paying all your bills -- from apartment rent to your Internet service -- consistently and on time is essential."
8. Consider getting a cell phone in your own name. "The sooner the student takes on responsibility, the sooner they will start building credit," Sullivan says. While some students can barely handle a credit card, others are more responsible with financial obligations. Those who are more mature should consider getting off their parents' cell phone plan and opening their own, which requires a credit check and builds good credit. You may not have good enough credit to get your own plan at first, and if you do, you may be given a spending limit for the first few months. But once you have proven you can pay each bill on time, that's another account in good standing on your credit report.
9. Do not apply for several credit cards at one time. Now that you have credit in your own name, don't go wild. If you apply for too much credit in too short a period of time, your credit score will fall. If you have built up strong credit over several years, it will hurt you less, "but if you have barely established credit and apply for multiple cards, it can lower your credit score significantly," Sullivan says. One credit card should be enough for most college students, he says. How many cards should you have? "To prevent excessive credit card debt, it's better for consumers to have as few credit cards as possible. Having just one card is ideal for most students," Davis says.
10. Only use student loans for education expenses and pay on time. "Students should view their student loan as a great way to cultivate important habits that will help them build and maintain good credit," Davis says. If you use them correctly, that is. Sullivan says he sees a lot of young people take out student loans to buy cars and other noneducation items. "Manage your loans by only borrowing what you need to go to school -- that keeps the balance down," Sullivan says. "When you get out of school, be prepared to consolidate when appropriate." Davis and Sullivan agree that the real key to keeping your loans healthy is to make at least the minimum payment every month and do it on time. Davis recommends paying more than the minimum to pay the loan off faster, and emphasizes that payments should be received by the creditor on or before the due date on the statement to keep the account in good standing.
See related: 10 ways student ruin their credit, "Piggybacking" gets reprieve from FICO, Surprise! Unexpected items can appear on a credit report
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