Establishing Good Credit in College
After you get that first card, how can you build up your FICO score?
Provided by Stephen Taylor, JD, CFP®
Good credit opens doors. It is vital to securing a loan, starting a business, and buying a home. When you establish and maintain good credit in college, you create a positive financial profile for yourself that can win over lenders, landlords, and potential employers.
Unfortunately, some college students do not have good credit. In fact, Credit Karma says that the average 18- to-24-year-old has a credit score of 630, which verges on bad. A FICO score of 730 or higher is considered good. 1
What are the steps toward a good credit score? To start, you need to utilize credit. About 15% of your credit score is built on the length of your credit history, so the sooner you purchase goods and services with a credit card and pay off that debt, the sooner you create a trustworthy record of credit use. 1
Aim to reduce the balance to $0 every month. Does this sound like a challenge? It may not be if you just use a credit card to purchase everyday things. When you start splurging and buying items worth hundreds of dollars with a credit card, paying off the balance in full can become a problem. 1
Pay your credit card bill on time. Roughly 35% of your credit history develops from your pattern of payments: how on time they are, how late they are. Procrastination is never your friend in college, and here is another example of that truth. So, schedule automated payments from your bank account, schedule reminders, or just try to pay the bill as soon as it arrives. 1
Refrain from applying for 2-3 credit cards at once. You may have multiple cards already, such as gas cards or store cards that offer you points or cash back for purchases. Those kinds of cards and one core credit card with a low interest rate and no annual fee are enough for most collegians. About 10% of your credit score reflects your history of credit inquiries, so if you suddenly apply for another 2-3 cards, you could hurt your score. 1
Another bad move is jumping from card issuer to card issuer – that is, getting a card, then closing that credit card account and opening a new one after a few months because you find another credit card with better perks. In doing this, you end up giving yourself a shorter credit history per credit card account. 1
What if you have problems getting a traditional card? If you have no income, you might run into this – or, there might be other reasons that make it hard for you to qualify for one. If this is the case, consider going to the bank or credit union where you have a savings account and applying for a secured credit card. With these types of cards, you transfer some money into an account linked to the use of the card, and that amount represents your credit card limit. Or, if you do not have a gas card or a retail credit card, consider applying for one of those as the bar is often set a bit lower. You can also ask to become an authorized user on a credit card held by one or both of your parents. 1
You can potentially help your credit score in other ways. Consistent bill paying is a plus for your credit history. If you do become an authorized user on a parent’s credit card and they use credit responsibly, just being linked to that account history could help your credit rating. If you are living off-campus, you might end up co-signing a lease; choose your roommates wisely. Financially negligent ones could hurt your credit rating if, for example, you are sharing utilities costs. With financially trustworthy roommates, you may avoid that kind of credit score damage. Lastly, if you move while in college, be vigilant about having your bills forwarded to you, to avoid missing payments. 1
Stephen Taylor, JD, CFP® may be reached at 305.722.0091 or Sat@SATWealthMan.com.
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1 – thesimpledollar.com/how-to-build-good-credit-in-college/ [8/29/18]