Having good credit means that you have been responsible in managing your finances related to paying bills (e.g., rent, utilities, phone), using credit cards, making loan payments, etc. Your fulfillment of obligations to creditors is reflected in your credit report, which includes the history of your financial activity, and your credit score, a three-digit number assigned by each of the three major credit reporting agencies (Equifax, TransUnion and Experian) as a quick reference for lenders deciding whether or not to extend credit or a loan to you.
Good credit can be a great advantage, because it may help you qualify for better credit cards, smartphone financing, a car or mortgage loan at a favorable interest rate, a leasing agreement or better car insurance rates. What’s the best way to build that good credit? Be strategic in your credit usage and develop good financial habits.
How to Start Building Credit
The sooner you begin building your credit, the better. There are several ways to do that while you’re in college. Here are a few ideas:
Start making monthly payments on your student loans. While it’s true you aren’t obligated to pay back your student loans until after you’ve graduated, making regular payments while you’re in school and during the grace period that follows graduation helps you not only get a head start on paying these loans off but also gives you the opportunity to start your credit history with a record of consistent, timely payments. Lenders and credit bureaus will see early on that you are a responsible borrower.
Become an authorized card user. Being named as an authorized user on a credit card in your parent’s or guardian’s name may be a great way for you to begin building up your credit. Credit card companies commonly report all cardholder activity to credit bureaus, so as long as the primary cardholder makes prompt, consistent payments, their actions will reflect positively on you as well. Be aware, however, that any missed payments or unpaid balances could negatively affect your credit, so be careful when considering whose card you sign onto.
Get your own credit card. Once you have built up some positive history and are comfortable with the process of using and paying your part of that shared credit card, you may want to consider applying for one of your own. There are many different types credit cards, so do some research to find the one that’s right for you. Look for cards that offer lower interest rates, low or no annual fees, and payment policies that are clear and easy to understand. Some banks offer credit cards made specifically for students with little or no credit history, and some offer secured credit cards that function like debit cards while counting toward building your credit.
Establish any new accounts — phone, rent, utilities — in your own name. Even if your parent or guardian co-signs or helps out with payments, put them in your name, provided you are certain you can meet the obligations of these accounts. While rent payments are not generally reported to the credit agencies, some landlords offer access to companies that will do that reporting on your behalf (for a fee), so that your on-time rent payments will help you build your credit.
How to Maintain Your Good Credit
Now that you’ve got some good credit building up, here are some tips for staying in good standing:
Spend responsibly. Be sure you’re using your credit card only on purchases you know you’ll be able to pay off at the end of the month. Treat it like a debit card — only spending the money you know you have available — to avoid racking up a balance. Using your card for small, occasional purchases will help keep your account active and healthy.
Pay on time. A strong credit score is built on consistent, positive behaviors. Late or missed payments, whether for a credit card, loan, utility bill or even a traffic fine may be reported to the credit bureaus, so prioritize paying every bill on time. Set up automatic electronic payments when you can, or set alerts to remind yourself when a bill is coming due.
Know your credit score. Once a year, you can request a free credit report from Equifax, Experian and TransUnion without affecting your credit. These reports may help you identify any problem areas you need to address. Visit annualcreditreport.com to order yours.