Your credit score is one of the most important numbers regarding your financial health, and most college students don’t even know theirs. Building credit early is one of the smartest financial moves a young adult can make, but the problem is that nobody really explains how to get started when you have no credit history at all.
The good news is that building credit from zero is simpler than it sounds. It just requires the correct starting point and a couple good habits. Here’s everything you need to know.
What is a Credit Score?
Basically, your credit score is a number calculated using 5 different variables. It takes into consideration your payment history, amounts owed, length of credit history, credit mix, and new credit.
Your credit score represents your credit risk to lenders . A higher credit score indicates lower risk for a lender.
Fico score is related to a credit score, and is used to indicate the borrower’s risk. The general Fico credit score ranges are as follows: exceptional (800-850), very good (740-799), good (670-739), fair (580-669), and poor (under 580). Borrows can be easily placed into these categories, making it simple to determine how reliable they may be.
Why Having No Credit is a Problem
What’s the big deal? Well, credit scores are an important metric. Without a credit score your financial freedom will be limited because banks will automatically classify you as high risk. High credit scores can qualify you for loan approvals, lower interest rates (which saves you money), credit card limits or offers, apartment rentals, and insurance premiums.
While you may not need all of these things right now, it’s important to look ahead and be prepared for the future. Building credit can take awhile, which means it’s best to start now so that it’s not a problem later.
How to Build Credit From Absolute Zero
There are a few reliable ways to start building credit as a college student with no history:
- Get a Student Credit Card
This is the most straightforward and effective first step. Student credit cards are specifically designed for people with little to no credit history. They typically have lower credit limits and more lenient approval requirements than standard cards. Some of the most popular options include the Discover it Student Card and the Capital One Quicksilver Student Card. Both offer rewards and have no annual fee.
The key is to use it responsibly. Make small purchases you would have made anyway, like gas or groceries, and pay the full balance every month. Done correctly a student credit card alone can build a strong credit score within 12-18 months.
- Become an Authorized User
If a parent or trusted family member has a credit card with a strong payment history, ask them to add you as an authorized user. You don’t even need to use the card, simply being attached to their account allows their positive credit history to reflect on your score. This is one of the fastest ways to build credit with zero risk.
- Consider a Secured Credit Card
If you can’t get approved for a student credit card, a secured card is your next best option. You deposit a fixed amount, usually $200 – $500, which becomes your credit limit. It works exactly like a regular credit card and builds your score over time. Once your score improves you can upgrade to a standard card and get your deposit back.
- Credit Builder Loans
Some banks and credit unions offer small loans specifically designed to build credit. You make fixed monthly payments and the bank reports them to the credit bureaus. At the end of the loan term you receive the money. It’s a low risk way to establish a payment history if credit cards aren’t your preferred route.
How to Use a Credit Card Without Going Into Debt
When getting started, most young adults will want to treat their credit card like their debit card. There are a few things we can do to avoid debt.
First, you want to make sure to pay the entire bill at the end of each month. By paying the “minimum payment” instead of the whole amount due you eliminate any chance for high interest charges.
Also, never spend money you don’t have. It can be easy to make a big purchase knowing there is security in your future income, but this is a big mistake. If anything goes sideways or if there is an unexpected change in your financial situation, this means debt.
Avoiding debt is crucial because we want compound interest to be working for us, not against us. If you would like to learn more about the power of compound interest, start with my posts about investing: How I Would Invest $500 Starting From Zero and Index Funds vs. Individual Stocks
The Bottom Line on Building Credit in College
Okay, so we’ve learned about credit and why it is important. What is our big take way?
Building your credit in college is crucial in preparing for necessary financial decisions in the future. Remember that building your credit is a slow process. We aspire to make this easier by building good spending habits and avoiding the debt-trap. The worst thing we want to do is get buried by compound interest.
Looking for related topics? Check out my post: How I Would Invest $500 Starting from Zero.
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