Financial Management: Jump Start Your Credit History
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Building a good credit history during your college years is certainly not required for a healthy financial life — but when done correctly, it will definitely put you ahead of the game. It is simply part of any good financial management plan. With that in mind, we’ve listed five easy ways in building a great credit history while you-re young.
1. Be a college student.
Already are? Superb. College students have an almost superhuman leeway from financial institutions in terms of credit extension and instability tolerance. Lenders understand, for example, if you change your address frequently during the past few years; after all, dorm- and apartment-hopping is almost required during those years. For almost anyone else, though, such shifty switching can be seen as instability. Imagine your professor changing houses every eight months, and even you’d start to wonder what he was avoiding.
2. Get a student credit card.
The easiest way to ruin your credit during your younger years is to handle a credit card irresponsibly. Having said that, if you pay attention to sound financial management principles, then this will likely be the easiest time for a person without credit to establish a good line. Lenders are willing to take a risk to extend credit to you, because you’re going to become a potential revenue source once you’ve grabbed your degree. Lenders might even expect parents to bail their kids out, lessening their risk even more. So grab a student credit card — just one, since this isn’t a bowl of candy at Halloween — and start using it well. That new piece of plastic is a double-edged sword, and if you can’t master the next step, you should avoid getting one altogether.
Take advantage of your student status. Many student credit cards have great rewards tailored just for you. These rewards are even better when you spend wisely and handle your credit responsibly!
Points and cash back. Choose between cash or great rewards.
- Citi® mtvU™ Platinum Select® Visa® Card for College Students
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- Discover Student Card
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3. Handle your credit card responsibly!
It may seem like a well-trodden topic by now, but if you don’t utilize your credit card responsibly, your credit will suffer in the long term.
Pay your bills on time! Some people may think its okay to let the bill slip for a month or two and just pay it off when you have the full sum. Don’t! Unlike dodging your buddy Bob for that pizza money last week, failing to meet your obligated payment to a financial institution will have consequences beyond just a cold shoulder. If for whatever reason you can’t pay the amount in full, at the very least have more than the minimum payment ready by the due date.
Pay your bills in full. Student credit cards have notoriously high interest rates, and finance charges can accumulate easily. You don’t need to keep a balance or accumulate interest in order to build credit, so pay them in full!
Remember to only charge on items that you can pay off fully within the monthly billing cycle. The minute you spend your credit beyond your earning means, you step into a world of trouble. While you’re paying on time and paying in full, keep your balances low as well — generally below 30% of your credit limit.
Simple strategy: Obtain a student credit card and charge your monthly cell phone, cable, or gym membership bills to it. Sign up for your checking account’s online account and set the bill pay feature to automatically pay your credit card every month. Put away your credit card and don’t use it. Voilà . You’re now building credit in your sleep.
4. Get a student loan if you need one.
If you already have one, that’s perfect: When you’re building a credit history, it’s a good idea to have a different mix of credit accounts. Having an installment loan (like as a student loan) will help diversify your credit profile a bit from other types of accounts, such as revolving accounts.
A credit card is a revolving account; that is, an account with no set term on when the entire balance must be paid back. In a revolving account, your balances, credit availability, and amounts owed can change as you make payments to the account. Unlike revolving accounts, installment accounts have a fixed number of payments — mortgage and auto loans also fall into this category.
5. Hitchhike a ride with someone else’s good credit.
One sure-fire way to get an instant credit history is to have someone add you on as an “authorized user” on their credit card account. With that strategy, the person’s account along with its entire history (good and bad) will show up on your credit reports.
As with other suggestions, there are a few things to watch for. Since all the account history will transfer over, if the account onto which you’re being added has had late payment in the past, you may actually be hurting your credit. Choosing a responsible person will also be important, as his (and your) future credit utilization on that specific account will also reflect on your credit history.
Simple strategy: Have your parents or trusted loved ones pick out a credit card with the longest positive history and have them add you on as an authorized user. Grab a free credit report from AnnualCreditReport.com after a few weeks and check if the account is reflected on your credit report, as some card issuer don’t always report authorized users to the credit reporting agencies. If the account doesn’t show on your credit report, have the person who added you contact their issuer to see if they can report your account to the reporting agencies.
If you’re a parent and you’re considering this method for your child, remember to pick out a card with the longest positive history. You should also consider making limited purchase on that particular account as to keep the balances on the account low and allow easier on-time payment — both are factors that will significantly help your child’s credit history and score. Your child will thank you for the sound financial management in the future.
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18 Comments so far
leave a commentI say avoid consumer/credit card debt altogether. That way you will not have to worry about stressing when you go to the mailbox. Most students have an emergency fund called Mom and Dad.
In college I ruined my credit with buying unneccessary stuff I did not need. Credit cards made it possible. I wish someone taught me about financial responsibility when I was in college. But then again I would have not listen ~
I really wished I hadn’t learned all about credit when I was in college. Sometimes, its actually better to be uniformed. You don’t play with fire if you’ve never heard of fire before!
OK, bad analogy, but you know what I mean. I wish I had never learned how to get my fico over 700. Live and learn I guess.
I’m excited to see this mymint thing. I use a spreadsheet for my budget right now, and you’d think with all the web 2.0 going around someone would make better tools for personal finance, I’m hoping that’s what’s coming!
Debt Kid
hey great site guys, all the posts are really good reads. but i sure wished i’d read them before i got my credit cards.
keep up the good work.
Great series. I am the “authorized user” on my mom’s credit card, and actually didn’t know that would help my credit. But when I checked myFICO, I got a 700+ score and one of the plus factors was the length of my credit history, i.e. Mom’s credit history.
I guess I inherited her great credit.
Great comments — we can clearly see two sides to the issue. Handling credit while you’re young is sort of a catch-22. Without a good credit history, it’s hard to get new credit. But without credit, it’s tough to build a good credit history.
If you’re able to handle credit responsibly (and I believe it isn’t exactly an impossible feat) it would be pretty advantageous for building credit while young.
Thanks for the comments guys and if you enjoy the posting so far, there should be even more worthwhile reads to come!
edit: forgot to mention that monday’s post will have more details on handling a credit card while in college.
Noticed something on Wikipedia: “Recent changes to the calculation system have caused authorized user information to be taken off of your credit report. It is a phased program, but by the end of 2008 no authorized user info will be used for credit score calculation.”
This is some of the worst advice I have every seen for college students. Few can handle the temptations of having credit, and there is no need to establish a credit score early in one’s college career. The message — borrow, pay, borrow some more, pay some more — is one that quickly gets out of hand. No where here do I see a recommendation for basic savings, or a pay-as-you-go strategy. I see no recommendation for using a debit card rather than a credit card. I see no recommendation for avoiding debt.
Sad that this site is giving such mixed messages to one of the most debt-vulnerable groups in the country. Shame on mint.com for publishing this.
Shii: Thanks for pointing that out. I’m actually aware of the issue, as Fair Issac have recently revisited the authorizer user factor due to auction-style websites with people “selling” their good credit. In short, they will add a stranger’s name and information into their credit card account to help that person boost their credit score, in exchange for monetary compensation. It’s a bit unfortunate that the trend limited the ability for parents to extend their credit to their child, as it was one of the easiest way to build immediate credit (Wanda is a testament to that method!).
HardLessons: I understand your concern in the temptations of having credit, but the article made numerous references to the care you have to take in utilizing a student credit card.
I’m not sure where you got the message of “borrow, pay, and borrow some more” from, as we never made any emphasis on having to go into debt to build credit:
Pay your bills in full. Student credit cards have notoriously high interest rates, and finance charges can accumulate easily. You don’t need to keep a balance or accumulate interest in order to build credit, so pay them in full!
Remember to only charge on items that you can pay off fully within the monthly billing cycle. The minute you spend your credit beyond your earning means, you step into a world of trouble.
In the simple strategy section, you will also see a suggestion that’s similar to a pay-as-you-go strategy:
Obtain a student credit card and charge your monthly cell phone, cable, or gym membership bills to it. Sign up for your checking account’s online account and set the bill pay feature to automatically pay your credit card every month. Put away your credit card and don’t use it. Voilà . You’re now building credit in your sleep.
If you do feel that the message is mixed, I’d be more than happy to revisit the article, as the last suggestions on authorizer user needs to be updated due to the recent changes in credit score calculation.
Shii is correct there will NOT be any piggy back on someone else’s credit. They are doing away with that. I think more needs to be said about avoiding debt. I know this is how to build a good credit record, but avoiding debt is always a must.
Just FYI for anyone else reading, the Wall Street Journal has a good piece today on building good credit history for your child. It’s currently free for non-subscriber.
In the article, Jonathan Clements point out the same thing that we’ve all point out, that the credit bureaus will do away with the the authorizer user strategy due to abuse.
He did give an alternative to authorizer user though, which is signing on your child has a joint account holder. Definitely a different ball game, as a joint account holder will be legally responsible for a card’s debt. You also can’t simply just take the child off the joint account when your child no longer needs the credit building help — you’ll have to cancel the card entirely to remove them from the joint account.
Joint accounts? I worked for Citi for a couple of years and the only joint accounts belonged to elderly people. I did not think banks offered joint accounts any longer. I will have to check on that!
Everest University Online offers multiple learning paths to get your degree completed!
I can’t believe that this is at this site. There are plenty of ways to up your credit scored honestly and without any cost. It does however take time. There is no magic fix!
I had already planned on having my son get a credit card from our credit union when he turned 18. I know the length of time on having credit is important. We had him sign up for his bank account when he turned 13. The problem was I knew it would be useless to just have a credit card and not use (as far as credit scores are concerned), so I really like your Simple Strategy:
“Obtain a student credit card and charge your monthly cell phone, cable, or gym membership bills to it. Sign up for your checking account’s online account and set the bill pay feature to automatically pay your credit card every month. Put away your credit card and don’t use it. Voilà . You’re now building credit in your sleep.”
I think that this is a good well-rounded article, as it’s important for people to be educated about debt as early as possible. Also, there’s a difference between good, well managed debt, and bad debt! It seems that there’s a big problem when too many young people dig themselves into a hole with credit that they don’t think about enough, especially if their parents never discussed good finance with them openly. It should be a basic topic taught at school.
I’m a British student who’s turning 21 this month, I have one student credit card and I always pay it in full each month — however I often go beyond the “about 30% of limit” rule, which I will now try to avoid. So if it’s £250 then I think I’ll not spend any more than £80 each month. I’m glad that I have a state-subsidised student loan though, which avoids commercial loan rates as it’s based on the rate of inflation. It’s better to obtain all the credit that I can get at this low rate (in addition to the grants and bursaries, of course!) and simply save what I don’t spend (I actually spend a lot less than most students I know it seems, mostly because I live at home at the moment — but I’m also “sensible” with gambling, alcohol etc). Although with the pitiful interest rates on savings accounts at the moment, and the risk of “quantitive easing” (i.e. “printing money”) from the Bank of England leading to high inflation, I hope my small savings aren’t devalued further…
At the end of the day, though, I don’t work yet, and I don’t spend beyond my means.