When you first move away from home, you’ll quickly learn that you need to establish and build credit to do many things in life, from buying a car to getting student loans or renting an apartment. The earlier you start working to build good credit, the better off you’ll be when you graduate and begin the job hunt.
But how can you build credit as a student? If you’re working while attending school, you’re most likely spending all of your earnings on expenses. You may be stretched thin financially — and staying on top of your finances is easier said than done.
The good news is there are many ways to establish and begin building credit, even if you aren’t earning much money. We’ll take a look at what goes into determining your credit score, along with a few tips to build credit as a student.
What is a Credit Score?
Lenders look at your credit score to determine whether or not you are a good candidate for lending and to evaluate your risk as a prospective borrower. Landlords, utility companies, and even some prospective employers will also look at your credit reports before deciding to work with you, so credit can affect many areas of your life outside of finances.
Credit scores are three-digit numbers ranging from 300 to 850, and there two major types of credit scores widely used in lending:
- FICO (formerly Fair Isaac Company): the FICO score was introduced in 1989 and there are now at least 16 versions of the FICO score There are models tailored to specific industries and credit products, and the most commonly used FICO model in 2022 is FICO 8.
- VantageScore: the VantageScore was jointly developed by the three major credit bureaus (Equifax, Experian and TransUnion) to compete with FICO. VantageScore allows those with a more limited credit history to establish a score, typically within one to two months of payment history rather than FICO’s required six months.
What Factors Determine a Credit Score?
With both FICO and VantageScore, similar factors go into determining the score itself, but these factors are weighted differently between models. Here are the 5 most influential factors that affect your credit scores:
- Payment history – do you make payments on time?
- Amounts owed – how much total debt do you have across all accounts, and what is your credit utilization ratio?
- Credit age – how long has your credit been established?
- Types of credit – do you have a mix of different types of accounts? Lenders typically like to see a variety of accounts, such as credit cards, installment loans (like an auto loan or student loan), and lines of credit.
- Inquiries – how many times have you applied for credit? This category only includes “hard” inquiries. A “soft” credit inquiry, typically done when checking your rate before applying for a loan, doesn’t affect your credit score.
5 Tips to Build Credit as a Student
Now that we’ve examined what goes into a credit score, here are a few ways to get started on building credit as a student.
1. Get a Student Credit Card
Opening your first credit card account is essential to building healthy credit. Many credit card companies offer cards geared toward students, with low credit limits, no annual fees, and cashback or other introductory offers. Use a resource like NerdWallet or Credit Karma to compare options and determine the best credit card to fit your needs.
Once you’ve opened a credit card in your name, you’ll need to use it responsibly. Try putting a few small purchases on the card each month and paying the balance in full rather than making minimum payments. It’s important to make payments on time each month, and when you’re just starting out, even one late payment can cause significant damage to your credit. Keep your overall credit card utilization low by knowing your credit limit and keeping the balance on your card minimal.
It can be tempting to use your new credit card on restaurant takeout or other items that aren’t necessities. Try to treat your credit card as if it were your debit card and only spend money that you already have (unless it’s an emergency). This will help promote healthy spending habits and ensure you can pay your balance in full each month, which will also allow you to avoid paying interest on your purchases.
2. Become an Authorized User
If you have a family member who will allow it, become an authorized user on one of their credit cards. Being an authorized user would let you get a card in your name under their account, but they would remain in control of the account as the primary account holder. You can then use the card to make purchases, while reaping the benefits of their spending and payment habits.
Not every credit card allows the authorized user to build credit, so check with your credit card provider first to ensure they will report the authorized user’s activity to the credit bureaus. It’s also important that the primary account holder has good credit habits and makes their payments on time, because their missed payments or high card balances could hurt your credit as an authorized user.
3. Student Loan Payments
Most people need to take out student loans to pay for college, and it’s important to exhaust all of your options for federal student loans before pursing private student loans. But if you do have to take out private student loans to help pay for your education, you can get a head start on repayment by making interest-only payments while you are still in school.
Many private student loan servicers allow you to make interest-only payments or a flat payment (such as $25 monthly) on your loans while you are still in school, which can save you a significant amount of money on interest in the long run. Making these payments will also help you build credit and improve your credit score by showing a strong repayment history.
Since the age of your credit accounts contributes significantly to your credit score, the sooner you begin building credit, the better. Having multiple types of accounts (student loans, credit cards, auto loans, etc.) will strengthen your credit profile, and managing these accounts responsibly is essential to getting off on the right foot.
4. Monitor Your Credit Reports
After opening your first credit account, you’ll need to begin monitoring your credit reports to avoid fraud. Even the most financially responsible person can have their identity stolen or their credit card skimmed and fraudulent charges made. You can combat this by monitoring your credit reports regularly and disputing any fraudulent charges, accounts, or errors.
Under federal law, you can receive one free credit report each year from the three major credit bureaus. You may also want to use a free credit monitoring service like Credit Karma to stay on top of your credit reports and catch issues as they arise.
Many credit cards also offer some form of credit monitoring where you can keep track of your credit score and see changes over time. Use these tools to your advantage to know where you stand financially and to protect yourself from fraud.
5. Establish Healthy Spending Habits
In addition to making payments on time and keeping credit utilization low, you’ll also want to ensure you do not open too many accounts in a short period of time, avoid excessive hard credit pulls, and keep from closing any accounts prematurely.
Having a few well-managed tradelines on your credit report and proving you can repay your debts is the key to a good credit score.
However, it’s important not to open too many accounts at once in a short period of time because this can lower your credit score. With each application, the prospective lender will conduct a hard inquiry which will lower your score by a few points.
Typically, several hard inquiries in a short period of time (typically 14 days for VantageScore and 45 days for FICO) for the same credit product is considered “shopping” and will be consolidated into one inquiry, but if there are multiple inquiries for different credit products, your score can be damaged.
It’s also important to keep your accounts open and avoid closing them prematurely. You may have a credit card you rarely use but closing that card can actually hurt your credit score, since the age of your credit accounts is a major part of what makes up your credit score.
We’ve stressed that making timely payments is essential to a good credit score, but even one missed payment can be a major hit to your credit. If you have difficulty keeping track of bills, consider setting up autopay for your accounts to ensure you never miss a payment.
The Bottom Line
Building credit takes time and hard work – it doesn’t happen overnight. It’s not always easy to keep your spending minimal when life happens and emergencies arise, but aiming to keep your credit card balances as low as possible and making payments on time will contribute to a higher credit score. Monitoring your accounts for fraudulent charges and reporting any fraud that occurs will also ensure your credit remains healthy.
The sooner you begin building credit, the easier it will be to gain financial independence and start your post-grad life on the right foot.
