Build Good Credit In College For A Bright Future
Building your credit while youre still in college can help you prepare for the realities of life after graduation. Youll need good credit to secure your own apartment and purchase a vehicle. Some jobs even run a credit check before theyll employ you. Good credit can help you qualify for loans and even refinance student loans for a lower interest rate. Working on your credit now could make these initial steps into life post-college easier.
Why Credit History Matters
You may be wondering why you need to worry about credit at all. When you get out of college, or even while you are studying, you may decide that you want to buy a house or take a large personal loan for a gap year. Without a good credit history, banks will not grant you the money you desire. Your personal credit history will show banks and lenders that you can take on a loan or line of credit and pay it back in a reasonable amount of time essentially that you know how to manage your money and stay out of extreme debt.
According to FICO, the median credit score in the U.S. is at 723. Borrowers in this range are only delinquent 5% of the time. Anything in the mid 700s and higher is considered excellent credit, and will be greeted by easy credit approvals and the very best interest rates.
You dont have to have high credit limits, own a house or a car, or take out large loans to build a credit history. The absolute best thing you can do for your credit history is to pay your bills and your debts on time, and keep your credit score at around 700 points or higher.
What Is The Average Credit Limit For A College Student
If youre a college student with limited to no credit history and are looking for your first credit card, you can expect a credit limit of $500 to $1,500. According to Sally Maes 2019 Majoring in Money study, students maintained an average balance of $1,183 on their credit cards. The same study found that 29% of students believed that one of the primary reasons for applying for another credit card is to increase their total credit, and 46% believed having multiple cards would help them improve their credit scores.
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Frequently Asked Questions About Building Credit In College
After establishing credit history, college students can increase their credit score by paying their bills on time. Late payments hurt your credit score, so make sure to pay on time and try to pay off your balance in full every month. Credit bureaus also give a boost to borrowers who keep charges low. Finally, consistently paying off loans helps raise credit scores.
Student loans appear on your credit report, so they can help establish your credit history. In addition, credit bureaus look at your credit mix, or the different types of credit accounts you have open. Student loans count as installment loans, a different type of credit than revolving accounts like credit cards.
Having a mix of different types of credit generally helps your credit score. Make sure you’re making regular, on-time payments on your student loans, as a late or missed payment can hurt your credit.
Yes, making payments on your student loans builds credit. Student loans qualify as installment loans in which borrowers make regular payments over a set period of time. These payments appear on your credit history and demonstrate your ability to repay a loan.
While student loans can help young adults build credit, they may also affect your ability to qualify for future loans. Banks often look at your debt-to-income ratio when reviewing loan applications. A high student loan balance could hurt your chances of getting another loan or securing the best interest rate on a new loan.
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 youre in school and not working, its unlikely youll 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-signers credit history. This could give you access to better termslike a higher spending limit and lower APRthan you would qualify with your more limited credit spending background.
The major caveat here is that while youll 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.
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Start Making Payments On Your Student Loans
Student loans can help you build a credit history in addition to funding your education. You can get federal student loans without having a credit check. Once you have the loans, they get reported to the credit reporting agencies and show up on your history.
To make your student loans work in your favor, ensure you are making payments on them as agreed. You can start repaying your loans while youre in school if you want to get ahead on payments and boost your credit. If you wait until you graduate to begin making payments, be sure to pay on time and pay the right amount.
What Impacts A Credit Score
The information on your credit reports is used to calculate your credit score. A credit score is a number that typically ranges from 300 to 850, though there are some models that range from 250 to 900. The information in your credit history affects your credit score, but the two entities are separate. You can review your credit report without accessing your score. Credit scores are often calculated by separate companies, like the Fair Isaac Corporation .
FICO uses a proprietary formula to calculate scores. While the company doesnt reveal the exact details about its formula, it has explained factors that influence a score and how each factor is weighted. FICO uses five types of information when calculating a persons score:
One misconception people often have is that checking their score or viewing their credit history will negatively affect the score. While a hard inquiry from a lender that is considering your application can cause your score to drop, a soft inquiry, such as you checking your own score, wont have any effect. Its smart to review your credit often, as doing so will help you detect and report any mistakes to the credit agency. The agency can review the issue and remove the inaccurate information from your report.
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Petal 2 Cash Back No Fees Visa Credit Card
The Petal 2 Cash Back, No Fees Visa starter credit card wants to take to heart peoples thoughts on it being time for a card company to help people succeed financially.
To heed this call, Petal has used modern technology to design credit card products that help you budget, control your spending, and build credit.
This card is best for those with thin to no credit files because Petal accepts applicants based on cash flow underwriting alonemeaning no credit history is required.
And if you have a credit score, you can get the opportunity for acceptance with a fair credit rating, meaning you need a minimum credit score of 600 or better. If you have a credit score of 720 or better, Petal auto-approves your application.
This credit card issuer reports your payment history to all 3 major credit bureaus, helping you build credit.
With credit limits as low as $300 and a higher credit line up to $10,000, 2% 10% cash back at select merchants and up to 1.5% cashback on eligible purchases after making 12 on-time monthly payments, Petal 2 might be an excellent choice to consider as a beginner credit card.
This credit card charges no fees whatsoever, letting you avoid simply holding the card in your wallet.
Dont Apply For Multiple Cards Simultaneously
So, youâve just been approved for your first credit card. Woohoo! And, now youâre tempted to apply for another. Donât do it. Itâs not a good idea to apply for multiple credit cards within a short time span for numerous reasons.
First, if a card issuer sees that youâve applied for multiple credit cards within a short time period – and they can see this – it will be interpreted as a red flag. As a matter of fact, some card issuers have policies which explicitly discourage multiple applications. By the same token, the more credit cards you add to your wallet, the greater chance you give yourself to dig your way into debt. As a full time student who only works part time – if at all – you want to be using your credit card sparingly in order to stay on top of payments. Increasing the amount of cards you have will likely increase how often you use them, and this could lead to debt that youâre unable to pay off.
Contrary to intuition, applying for multiple credit cards is not good for your credit. This is because each time you apply for a credit card, the credit issuer makes a hard inquiry into your credit report. In the short term, these hard inquiries lower your credit score and in the long run multiple credit inquiries can give you the appearance of being a credit risk.
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Do Consider Other Types Of Cards If You Don’t Qualify For A Traditional Card
The Credit Card Accountability Responsibility and Disclosure Act of 2009, also known as the CARD Act, makes it harder for anyone under 21 to apply for credit without a co-signer or proof of a full-time income. However, there are other options for a credit card if you can’t qualify for a traditional one or get a co-signer.
A secured credit card is offered through banks and is associated with a savings account you have. You put a specific amount in a savings account associated with the card, and that amount is your credit limit. Often credit cards from a retail store or gas station have different restrictions, so they might be easier to acquire.
Open A Secured Credit Card
A secured credit card is another option for building credit if you dont have a credit history or if your credit score took a hit at some point. You are almost guaranteed to be approved for a secured credit card because of the way a secured card is set up.
Much like a debit card, a secured credit card is backed up by your own cash, paid in the form of a deposit. This deposit will serve as part or all of your credit limit. The difference, however, between a secured credit card and a debit card is that secured credit card activity is reported to credit bureaus. Using your secured card to make small daily purchases is a great way to build your credit score and have access to unsecured credit cards in the future.
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Use Your Credit Card Responsibly
Like all good things, spending must be done in moderation. You may think that in order to get your credit score up fast, you have to use your credit card a lot. However, credit scores are based on consistent account activity, not high overall numbers. Coming in close behind payment history for credit score calculation is credit utilization.
Equally as important as paying your bills on time, is not overcharging your card. Credit utilization refers to the amount of your credit limit that youâve used. For example, if your credit limit is $1500 and youâve charged $400 to your card, then your utilization would be about 27%. Itâs recommended to keep your credit limit no higher than 30% of your available credit. So, in this example, you wouldnât want to spend more than $500 at a time. You want to have credit as an option, but you donât want to be dependent on credit.
If youâre afraid you may give into temptation and break this rule, then put in a conscious effort to treat your credit card like a debit card. Only make purchases that you know you can pay off. Starting off with good credit habits will make them easier to maintain over the long run. By keeping your credit utilization low and regularly paying off your credit card purchases, youâll keep your credit account active and your credit score up!
Start Using A Credit Card Right Away
are one of the most useful tools for building credit, so it pays open one as soon as you can and charge at least a couple of expenses on it that you pay off month after month. That said, getting your own credit card can be tricky if you don’t have much of a credit history, which may be the case if you’ve recently wrapped up college and haven’t been responsible for your own bills yet.
If you can’t qualify for a regular credit card just yet, you can look at opening a secured credit card. A secured credit card doesn’t give you a whole lot of buying power because what you’re really doing is putting down a deposit with your own money that serves as your credit limit and charging against it. But secured credit cards can help you build credit, so it’s worth going this route if you can’t manage to get a regular credit card.
Another option is to see if you can get added as an on an established credit card account. Your parents may be willing to add you to one of their accounts, as might an older sibling or another family member who trusts you. Even if you don’t make purchases using that card, any positive credit activity stemming from it, like timely bill payments, will count toward your own credit record.
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Q When Is The Ideal Time To Open Your First Credit Card
When you can responsibly manage it. Building credit is an important step to financial independence, but doing it right is better than doing it early.
It is difficult to perceive how often we swipe because each swipe is generally small. Spending $5 here and $10 there does not feel like much, but it adds up quickly. A person must be disciplined enough to monitor the balance and ensure that they can pay it off in full each month.
Carrying over $500 at 24% interest for just one month adds $10 to the cost of that item. Carry it for six months, and you have added $60 to the cost.
Being responsible about charging is only part of the process, though. You must also be responsible about paying the bill on time every time. Late payments cost you money in fees and black marks on your credit. If you are not organized and able to manage a bill pay process consistently, it might not be the right time to open a credit account.
A Secured Credit Card
A secured credit card is a great option if you want to build or establish credit but dont want the responsibility of a traditional credit card. Lets say you have $500. With a secured credit card, you deposit that money as security for your purchases. A secured credit card will then give you a limit of $500 to spend on the card. The amount you deposit determines how much you can spend.
As long as you are making your payments, that money is held and secured there for the lifetime of the card. If you default on your payments, the credit card company will start withdrawing the funds you owe. As you make your payments on time, its reported to your credit bureau. This will help you build credit. Secured credit cards are a great way to get a feel for making payments.
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