Credit Tips: How to start building credit in college

If you haven’t already had someone nag you today about becoming an adult and doing adult things well.. you’re lucky, and if you already have then I’m sorry I’m going to join that list. As you will soon realize, college will one day come to an end and you’ll join the real world. You’ll quickly realize how much you need and want this thing called good credit. Lucky for you, it isn’t too hard to obtain and if you’re smart and disciplined, it’s not too hard to keep.

So what is credit?

At a really high level, credit is essentially a public report that credit agencies share about you on how likely you are and how good you are at paying back debt. On this report, there is a number that ranges from 350-850 and the higher of a number you have, the better.

What goes into a credit score?

Your credit score is comprised of 5 different parts: payment history (35%), amount owed (30%), length of credit history (15%), types of credit (10%), and new credit (10%).

  1. Payment history: This should be an easier 35% as all you need to do is pay your bills on time  If you’re forgetful set up automatic payments or reminders
  2. Amount owed: Borrowing money is okay, banks just don’t want to think you’re desperate. Having a car loan, student loans, a mortgage, etc. is okay, just try to live within your means meaning maybe opting for the Chevy instead of the BMW. In respect to credit cards specifically, always try to use less than 10% of your credit line. This isn’t always possible, so try paying your credit card off multiple times before your statement actually cuts and thus you prove you are living within your means and don’t need money.
  3. Length of credit history: The longer you’ve been working on your credit, the better. This is why it’s important to start working on your credit early. After only a year or two of working on your credit, you can easily qualify for the best credit cards and great interest rates on loans.
  4. Types of credit: Having a mix of credit history is great and shows you are capable of paying off different types of debt such as a credit card bills, student loans, car loans, etc. Yup you read that right.. your student loans will actually be good for one thing (figuring you pay them off).
  5. New credit: Like I said earlier, banks don’t want to think you are desperate. Applying for a couple of credit cards here and there or applying for a car loan is completely fine. Banks however will start caring once you apply for a ton of credit really quickly such as several credit cards in only a few short days.

Tips to get started

If you already have student loans, you’re one step ahead. If you don’t have or won’t need student loans, apply for a student credit card and pay it off in full and on time. My first credit card was with Discover, the Discover it for Students, and I still have the card today (remember length of credit?) and would strongly recommend it. It comes with 1% cash back on all purchases and quarterly 5% bonus categories such as gas, restaurants, Amazon, etc. Discover also gives your FICO credit score for free every month with your statement.

Next sign up for Credit Karma or Credit Sesame. While they only estimate your credit score, they do it pretty darn well. You can monitor your credit report, see your credit score increase and ensure your identity has not been stolen.

After a few months, see if your credit union will allow you to request a credit line increase using only a soft pull. A soft pull inquiry doesn’t show up on your credit report and merely is a “quick” check of your credit. A hard inquiry will show on your credit report and will be a sign that you are requesting new credit. Hard pulls result from applying from new credit cards, applying for car loans, applying for student loans, etc. You’ll want to limit hard pulls otherwise your score will dip a few points.

Synopsis

Credit is a must in this day and age. Especially if you ever want to buy a house, buy a car, or apply for credit cards to earn sign up bonuses. Follow the steps below to start working on your credit.

  1. Owing money in student loans is okay and will help your credit (as long as you pay it off)
  2. Apply for a student credit card and pay it off
  3. Sign up for Credit Karma or Credit Sesame to monitor your credit for free
  4. Request credit line increases every few months as long as your credit union is willing to do it with a soft pull

For more information about credit and credit scores, I find MyFICO to be a great source. Much of the information in this post, I’ve learned from MyFICO.

-Nick a.k.a. Points Tutor