There’s a lot to manage as a college student, between classes, homework and a newfound freedom that is as exciting as it can be disorienting. Financial freedom is yet another weight added to your backpack of new responsibilities.
Your credit history may be far down on the list of your current financial priorities, which is understandable. But it’s never too early to start thinking about credit. Whether you’re thinking of taking out a student credit card, a secured card or simply want to understand where your credit stands today, now’s a great time to start focusing on your credit.
As with other aspects of your finances, building good habits early can pay off big time later. If properly managed and monitored, you can build a healthy credit history while in school, so when you’re out of college, you’ll be better prepared for the next steps in your financial journey. Below are some tips to help you build credit as a young adult in college.
Get a credit card
At age 18, credit opportunities may be delivered to your door in a literal sense. You may balk at credit card applications, worried about the effects they could have on your monthly budget and financial future. That’s a healthy concern. Though, having and using a credit card can be a good way to build a credit history.
A long history of on-time payments is a positive sign of healthy credit and can help prove creditworthiness. That means lenders may see your credit history as favorable when you look to apply for loans in the future, like an auto loan, mortgage or another credit card.
Of course, if you’re worried you may mismanage a credit card and spend more money unnecessarily, it may be best to wait until you feel you have your finances and budget in order before applying.
You may be wondering, are there credit cards for students with no credit? In fact there are. Here are two types of credit cards to consider:
Student credit cards
Student credit cards are exactly what they sound like — credit cards with terms and features with students in mind. Student credit cards typically have no annual fee and a lower credit limit, which is the maximum balance you’re allowed to carry on the card. Some student credit cards may offer cash back or points for purchases and rewards for when you redeem those points. You may even see student credit cards with welcome bonuses. This usually means you’ll get bonus rewards points or cash back if you spend a certain amount on the card within a specific time frame.
Have a healthy caution with these kinds of offers. The card may seem lucrative, but if it causes you to spend more money than usual and you have trouble paying down your balance each statement period, it could cost you more in interest charges than the bonus is worth.
How do you get approved for a student credit card? Like with other credit cards, you usually have to prove some sort of income. Having a job, even if part-time or on campus, can help your chances of approval.
Secured credit cards
A secured credit card is an option for students with no credit or a limited credit history. It’s different than a traditional credit card because the secured card is funded with your own money. When you open a secured credit card, you make a refundable deposit into the credit card account. That deposit amount then acts as your credit limit. For example, if you deposit $500 into your credit account initially, your card limit will be $500. This is the maximum amount you can charge on the credit card at any one time.
Because you’re supplying the deposit, which is collateral, it’s much easier to be approved for a secured credit card than a standard credit card. Lenders will report the activity of your secured credit card to the credit reporting agencies like they would for a standard credit card, so you’re still building your credit history. With continued use, you may be able to graduate into a regular card. If you close the account in good standing, you will get your original deposit back.
There is a litany of credit card options. Make sure you choose a credit card that’s right for you and your lifestyle. You may not need a fancy, expensive travel card. And you certainly don’t need to put all your spending on the credit card. A couple small purchases a month will keep the account active and ensure your balances never get too high. As long as you pay it off in full each month, you won’t pay any interest and it will help you build credit.
Check your credit report
Now that you’re building your credit history, you should also be monitoring your credit reports consistently. You can get your credit report from each of the three nationwide credit reporting agencies, TransUnion, Equifax, and Experian, for free each week at annualcreditreport.com. You want to make sure your report accurately reflects your credit history. The more you read your report, the easier it is to understand and track important changes. We’ve created a free guide to reading your credit report with explanations of the important sections.
Know the credit score factors
As lame as it may sound, knowledge is, in fact, power when it comes to a better credit score. If you understand the common credit score factors across scoring models, it can help you make better decisions when faced with a credit card-related dilemma, like whether to keep an account open or closed or if you should open new accounts. Your payment history and credit utilization tend to be influential credit score factors. Accordingly, making payments on time and paying more than the minimum will help you build and maintain a healthy credit history. There are different credit scoring models, so you may have different credit scores depending on where you get your score. But in general, the factors tend to overlap.
Practice smart financial habits
Taking out a student credit card, or a secured card, can be a good way to start you on the path to building credit. An active, healthy credit history can help your odds of approval for major purchases like an auto loan or a home. It may also help you secure better terms, which is a big money saver for these large expenses.
Building good habits today can pay dividends after you graduate. For instance, paying off your credit card balances in full each month won’t just benefit your credit score, but it can help you avoid high interest charges. Building these habits now lays the foundation for a healthy financial future.
College is a great time to develop a budget that works for you. Everyone is going to have a slightly different approach and their own values when it comes to spending and saving. The sooner you determine how you like to best manage your money and establish savings goals, the better off you’ll be.
Your financial and credit journey will certainly have setbacks and things won’t always go to plan. But the more you’re actively engaged, planning and monitoring your finances and credit, the more prepared you’ll be for whatever is thrown your way.