Before we go into how can a college student build credit, let’s focus on the uses of credit.
The primary reason you will want to build credit history is to borrow money or show a person or a business that they should have faith and depend on you to keep your word.
How Do You Get a Credit Score?
Once you turn 18, you will be eligible to build credit. First, you must have a source of income. If you don’t have a job or a regular source of income where you can make money in college, then you should work on that first. The worst thing you can do is open up lines of credit without the means to pay them.
With an income, you will be ready to get your first line of credit. Borrowing money and repaying that money is the way that you as a college student can build a credit score.
The Five Components of a Good Credit Score
There is no denying that a high credit score is important for purchasing a home, renting an apartment and even being hired by certain employers. When you have poor or no credit, it is important to know how to build a good credit score.
Improving your credit score hinges on 5 key components as outlined below.
1) History of Credit
Determining your credit worthiness is, in part, decided on by how long you've been holding credit. The longer you have successfully been using varying types of credit, the better a consumer you will be, thus making your credit score higher.
If you have an older account that you are not using, keep it open. This will continue to help your credit history thus improving your credit score.
2) Payment History
Nothing affects your credit score more than your payment history. If you have maintained on-time payments over a course many years, your credit score is going to reflect that. The best way to improve a bad credit score is to make on-time payments each and every month without fail.
3) Credit Limit to Balance Ratio
The ratio of how much credit you are provided to how much you actually owe is another large component of a credit score. Lenders are looking to make sure that you have not over extended yourself. Aiming for a 20% debt ratio or lower is best. That is to say that you should hold no more than 20% of your credit potential in debt. If you are extended $10,000 in credit, you would want to make sure that your total debt is less than $2,000.
4) Types of Credit
Credit lenders are also looking at the types of credit you are holding. A mixture of store credit cards, major credit cards and loans shows that you are capable of managing the different payment types and credit limits that comes with them. That will help you build credit. Credit cards typically have small minimum payments and a lender who is looking to extend a loan with a larger payment will want to feel confident that you can handle a regular payment that may be significantly higher.
5) Frequency of New Credit Received
Credit lenders are also looking at how often you are applying for and receiving new credit. A large number of new credit cards could indicate that you are having troubles with your financial situation. It could also indicate a potential for over extending credit. Conversely, lenders are looking to see if there are frequent inquiries into your credit as well. This could indicate financial problems as well.
The exact amount that each of these components affects your credit score is unknown but diligence with each one will ensure you a high credit score as well as maintain a healthy financial situation.
Should I Get a Credit Card or Store Card?
Most young adults automatically think of a credit card when they think to build credit but that is not the only way to build credit. Many stores offer lines of credit in house, such as Best Buy and the Gap. The difference between a Visa or Mastercard credit card and a store card is mainly the terms. Generally store cards charge higher interest rates and have higher fees associated. But you won’t have to worry about that. Also, store cards do not offer cash back. The best cash back credit cards will not be store credit cards but rather a card like Visa or Mastercard.
How Can I Use Credit Wisely?
The best way to build credit without going into debt is to charge a small amount each month, maybe your cell phone bill or other monthly bill, to your card and pay it off immediately. That way you will begin to build a stable credit history without accumulating debt.
Once you get started building credit, it’s important to be responsible with the credit that you have. In most cases, bad credit is worse than no credit at all.
As someone who has experienced the ins and outs of debt and credit I would like to help you start on the right financial footing. It makes no sense to apply for and open a credit card if you do not know how to use credit wisely.
Today, I'm going to give you 4 easy ways for you to use credit wisely as a millennial.
1) Open and Use Credit
Firstly, you have to borrow money in order to start building a credit history.
It is important for you to have a credit history, because it will help you in the future when you want to borrow money.
It could also help you with employment. There are many employers that look at your credit history before offering employment.
To start building a clean credit history, get a credit card but just put a monthly bill on that credit card.
DO NOT use the card for going out to eat or taking vacations. Use the card as part of your monthly budget.
This is a great habit to get into and the best way to use a credit card.
For example, when I started using credit cards again after a two year hiatus, I linked my cell phone bill as an automatic monthly charge.
I'm using the credit card each month and I'm paying it off in full each month. Doing this will help establish your credit history.
2) Keep a Low Utilization Ratio
Secondly, you should keep the amount that you borrow, as a percentage of your total credit, to a low percentage.
This is called the utilization ratio.
Anywhere between 30 to 40 percent is a good starting point, and lower is better.
Here is the example.
If you're able to get a credit card that has a 1,000 dollar balance, you should carry a maximum balance of 300 dollars.
Although it can be tempting, do not charge up to the thousand dollar limit. Keep a low utilization ratio.
3) Pay Credit Cards in Full, Don't be Late
This tip may seem like a no brainer but for some reason it is frequently ignored.
Pay your bills on time. Pay them early.
To make bill paying systematic, set up an automatic bill pay each time your statement is sent.
I still recommend that you check your statement for errors but keeping your finances simple is a great way to stay on track.
4) Keep an Eye on Your Credit Report
Finally, you should keep an eye on your report. I use AnnualCreditReport.com to get a copy of my credit report each year.
It's free and you are allowed to obtain a copy from each of the credit bureaus.
If you would like to see your free credit report more than once a year then only request one copy from one of the credit bureaus each 4 months.
That way, 3 times a year, you will be able to see a copy of your free credit report from each credit bureau.