Don’t wait: Begin building credit in college
March 27, 2017
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Building credit is an exciting, but daunting, task. Your credit score can stand in the way of qualifying for a loan, obtaining car insurance, renting an apartment or getting a job. As a college student with little-to-no income, the idea of building credit can be terrifying. But you’re doing yourself a favor by establishing good credit in college, and it’s not as difficult as it seems.
Have your parents add you to their existing line of credit
The hardest part about beginning to build your credit is convincing a creditor to trust you enough to give you a line of credit. A good way to bypass this is to be added to a parent’s credit card as an authorized user. This will build your credit and will give you the feeling that “big brother is watching,” making it less tempting to go crazy spending money you don’t have. This is also a good step if you are nervous about using credit at first. By being an authorized user on a parent’s credit card, you are still building credit, even if you are not using the card yourself.
Keep in mind that this step is not required, as a parent may not be comfortable doing this, or for many other unrelated reasons. It is still possible to build credit without being added to a parent or guardian’s credit card line.
Understand interest rates
Every credit card comes with an interest rate. Though some may offer deals that allow you to spend interest-free for a year or so, eventually an interest rate will be applied to your card. This interest rate is called the Annual Percentage Rate, or APR. An annual percentage rate determines how much interest you will pay on each purchase you make. Each card will offer a different APR, and it should heavily impact your decision on whether or not to open a certain line of credit.
When checking out at many retailers, you’ll be offered a line of credit through the store. This can be tempting because many of these cards can be used anywhere and often come with promises of coupons and special discounts. But read the fine print.
As of 2014, the average interest rate for a store-brand credit card with the ability to be used anywhere was 21.63 percent, according to a survey by CreditCards.com. This is a huge difference from the average student credit card granted by a bank, which is only 13.24 percent.
Pick the right card for you
A high APR does not mean that you should never apply for a retail card. In fact, these retail cards can be an easy way to start off with if you’re having trouble being approved for a card. But know yourself. Though the goal is to never carry a balance, if you know you may occasionally carry even a small balance, go for a card with a lower APR.
Google is your friend, so take your time and do your research before committing to a credit card.
Banks and credit unions usually offer the lowest APR’s, according to CreditCards.com. But again, read the fine print. Even banks and credit unions have seemingly endless options when it comes to cards with travel rewards, gas rewards and even cash back deals. Do your research and take your time in choosing which card is right for you.
Another option that many banks and credit unions offer to build credit is a secure line of credit. With a secure line of credit, the user offers the bank or credit union some sort of collateral in exchange for a low-limit credit card.
With most banks, this is a cash deposit they hold as you build your credit. For example, you would put $500 down and be given a credit card with a $500 credit limit. You use that card and pay off the balance as you would any other credit card. Once a specified amount of time passes, you get your original $500 back. This shows that you’re responsible enough to use a credit card but gives the bank peace of mind that they have that money ahead of time in case you don’t pay.
Once you’re approved, use your card
When you finally have that card in your hands, don’t be afraid to use it. Opening a line of credit and then never using it does nothing for your credit score. It’s advised that you use your credit card for occasional, small purchases, according to CreditCards.com.
A suggestion they offer is putting recurring purchases, such as your Netflix account or other subscriptions, on your card. Others use their card every time they get gas. By using your card regularly on smaller purchases, you won’t run up a sky-high balance, but you will begin building up a consistent credit history quickly.
Pay off your balance
Though it may be tempting to pay only the minimum balance on your credit card, don’t fall into the trap of carrying a balance. By paying the minimum balance, you’re often only chipping away at the interest added monthly. Pay off your entire balance monthly to not only avoid interest, but to show creditors you’re responsible and not spending more money than you have. This will make it easier down the road when you’re applying for a home or auto loan, as creditors will know you’re responsible enough to make smart decisions about spending.
Other important points to remember when building your credit
Credit cards are not the only factor that affects your credit. Medical bills, traffic tickets, phone bills and the like can all greatly impact your credit. Pay all of your bills on time to avoid hurting your credit score.
Don’t apply for multiple credit cards at once. Each time you apply for a credit card this is a hard-hit on your credit score. This means that when a creditor looks at your credit score, your score goes down. Though it can be tempting to apply for 10 cards at a time, by applying for too many at once, you can be hurting your chances of improving your credit or getting any card in the first place.
And finally, don’t ever co-sign for your friends, no matter how much you think you can trust them. You never know what kind of financial trouble a person will end up in, and when they can’t pay for what you co-signed for, it’ll be on you to come up with the cash. And if you don’t? Your credit will be destroyed and will take years to build back up.