As the new academic year approaches, the last thing college students are thinking about is building credit for their post-graduation lives. However, building credit while in college is a key step toward establishing a strong financial foundation. Here’s why.
As the new academic year approaches, the last thing college students are thinking about is building credit for their post-graduation lives. However, building credit while in college is a key step toward establishing a strong financial foundation.
That’s why Vered DeLeeuw and her husband, Ido Sarig, added their daughter, Tamar Sarig, as an authorized user to their credit card before she started her freshman year at Harvard University in 2018. DeLeeuw, author of the site Healthy Recipes, and her husband immigrated to the U.S. from Israel in 2009, and she recalls how difficult life in the U.S. was without a credit history. They often had to pay for goods in cash or received limited contracts, such as for a mobile phone plan.
The couple ultimately built up their history, but they were determined to pave an easier path for their daughter. A year after adding her as an authorized user, the fruits of their plan have begun to blossom.
“For the past few weeks, we’ve started getting credit card offers in the mail for her,” DeLeeuw said. “It worked better than I had ever hoped for it to work.”
The goal was not to accrue credit card offers, however. It was to establish a credit history for Tamar so that when she graduates, she’s not starting from zero. Building credit is hugely important, and the actions you take as an undergraduate could influence how easily you transition into the professional world.
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Your credit history affects your ability to qualify for jobs, apartments and loans
Even if you have no intention of buying a car or home for the next 10 years, you still need a credit history. Oftentimes, landlords and property management companies will run credit checks on apartment applications. If your credit score is low or your history is nonexistent, you may be rejected, or you may have to put down a hefty cash deposit.
“That is something that a lot of students don’t think about … your credit score can impact your ability to get a good apartment,” said Stephen Gunter, certified financial planner at Bridgeworth advisory firm. “We all think about what a credit score means when purchasing a house, but not everyone thinks what it can mean for renting as well.”
Gunter said some students may be able to ask their parents to co-sign for loans and other major needs, but not all parents have the credit or inclination to do so. However, he said, “Anyone can open a credit card and use it responsibly to pay one of their monthly bills.”
Depending on the field in which you plan to work, a troubled credit history can also cost you a job, so it’s best to build credit now and maintain a high score.
Neale Godfrey, chairman of the Children’s Financial Network, said taking control of one’s credit profile is a critical component in college students’ growth as they plan for their futures.
“If you’re going to be an adult, then act like one. And adults need credit,” Godfrey said. But, she added, “the paradox is that you need credit to get credit.”
Godfrey recommended getting a job so you can prove you have the income to pay your credit card bills every month, and then apply for one card you can use to establish credit. Look for one that has a 0 percent APR introductory period, she advised, though you also want to know what the interest rate will be after that period ends.
You can also look for credit cards with student-friendly benefits, such as no annual fees, cash back rewards and statement credits for maintaining a good GPA.
Use the card for small purchases and pay off your statements every month.
“You need to think about [a credit card] as a debit card,” DeLeeuw said. “You have to be able to pay back everything when the statement arrives.”
Using a credit card teaches you money management skills
The worst thing you can do with a credit card is spend recklessly. But if you get in the habit of using your card for some expenses each month — say, gas for your car or your smartphone bill — and paying off the balance, you can boost your score easily.
Being strategic in that way gets the wheels turning around financial planning, which is a highly valuable life skill.
“Financial planning for the most part boils down to being proactive as opposed to reactive,” said Peter Palion, certified financial planner and president of Master Plan Advisory. “If you’re proactive early on, a student can graduate with a credit score over the magic 760 or 780 without a whole lot of effort.”
The act of selecting a credit card strengthens your financial decision-making muscles as well. Comparing interest rates, annual fees, rewards potential and other details associated with different cards will get you in the habit of taking a discerning eye to financial offers. That skill will serve you for years to come, as you compare rates and fees on auto and mortgage loans as well.
See related: How to get a credit card as a college student
There will never be a better – or easier – time to build credit
Qualifying for credit cards without credit is tricky. But if your parents are still involved in your financial life, whether through paying your tuition or some other form of support, they may be willing to lend a hand here, too. They can add you as an authorized user to one of their credit cards, as DeLeeuw did with her daughter.
Zina Kumok’s parents did the same, adding her to their card when she was in high school. This not only allowed Kumok, now a personal finance expert at DollarSprout.com, to establish a credit history but it also gave them oversight into her spending.
“Coming out of college, I already had a 700 or 750 credit score, truly through no effort on my part,” Kumok said. “I didn’t realize what a gift they gave me.”
She saw the stark contrast between her experience and those of her peers when she moved into an apartment with friends. As she and her roommates divided up which bills they’d manage, one had to put down a cash deposit to set up electricity in the apartment because he lacked a credit history.
You may not want your parents to know every time you splurge on an off-campus dinner or new dorm décor from Amazon. But having them involved can be beneficial, as they can help you budget if they see that you struggle with overspending. Assuming they have good credit and healthy financial habits, they can provide guidance that will help you avoid situations like that of Kumok’s roommate.
See related: Rewards card tips for saving on college textbooks
You can earn cash back bonuses and travel rewards
If you choose a card with reward bonuses and use the card consistently, you can accrue cash rewards, airline miles and points you can redeem for hotel stays. Miles and hotel stays can be especially useful if you plan to travel during school breaks or have been planning a post-graduation backpacking adventure.
Bear in mind, however, that it takes a while to earn enough travel miles or points to cover any substantial portion of a trip. Instead, you may want to ask your parents to add you as an authorized user to one of their travel rewards cards and work out a deal in which they’re willing to let you use some of the points accrued, provided you contribute your share to the monthly bill.
For racking up rewards on your own, you may be better off with a student-focused card that promises a cash back percentage or other perks, such as free access to Amazon Prime.