There are so many ways to build credit as a college student, and not all of them involve using a credit card. In fact, there are many ways to build credit from scratch without a credit card. Let's first dive into what credit is, ways to improve your credit score and if you're ready, what credit card you should get.
: the big, bad word that somehow entered your vocabulary your freshman year of college. If you didn’t have one of your parents fill out your FAFSA
, it may have entered your vocabulary even sooner. Remember that frantic moment when you were Googling how to fill out the FAFSA in the first place?
Hang on a second. Being aware of your credit this early on in life is actually an awesome thing. It’s a huge benefit to understand credit at this early stage of impact and, once you understand it, you’ll realize there’s nothing to fear.
Credit is entirely manageable, so long as you educate yourself first. The horror stories come from people who learn about credit after
they rack up unnecessary debt on credit cards. Then when they actually need to buy something useful, like a car, they have a credit score reality check.
Let’s start this education with the basics.
What is a credit score?
Credit Score: “A number assigned to a person that indicates to lenders their capacity to repay a loan.” (Thank you, Oxford English Dictionary!) Basically, your credit score is what tells a bank how likely you are to repay a loan they give you.
Credit: “The ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future,” according to the experts at the Oxford English Dictionary.
These two factors work together and affect each other directly. Your credit score determines how much credit a lender is willing to give you. How quickly you repay that loan will affect your credit score.
There are two main scales by which credit is monitored, the Equifax Credit Score
and the FICO Score.
Equifax Credit Score
uses a numerical range of 280 to 850, where a higher score indicates a lower risk for issuing credit.
Under the Equifax range, your score would fall into one of the following ranges:
- 280 to 559 - Poor
- 560-659 - Fair
- 660 - 724 - Good
- 725 to 759 - Very Good
- 760 to 850 - Excellent
scores can range from 300 to 850, with 300 being the worst and 850 being the best.
Under the FICO range, your score would appear in one of the following tiered categories:
- 300 to 579 - Very Poor
- 580 to 669 - Fair
- 670 to 739 - Good
- 740 to 799 - Very Good
- 800 to 850 - Exceptional
Where does your credit score start?
Typically, when you’re in college and don’t have a car or a credit card associated with your name and social security number, you don't have credit. That doesn't mean you have bad credit
. It simply means your credit score doesn’t exist. In general, you don't get a credit score and until you’ve had loans or a credit card in your name for at least six months.
This distinction is important. While you haven’t done anything wrong, not having a credit score means that it might be hard for you to get a loan or a credit card with good interest rates.
It can also become a problem after you graduate and begin looking to lease an apartment or buy your first car. These factors are why it is important to build credit as a college student, before you're stuck with no credit, or worse, bad credit.
How you go about this is also important. Horror stories can
happen if you’re not careful and responsible.
First, take an honest look at yourself and your finances. Look at your monthly spending and income to determine if you’re ready for the responsibility of a credit card. Hint
, if your bank account tends to overdraw until mom and dad resupply, it might not be the right time for you to open a credit card on your own, and that’s okay!
While opening a credit card is a fast way to build credit, it can be risky if you don’t have steady income of your own. Fortunately, there are less risky strategies you can take and safer ways to build credit as a college student.
How to build credit from scratch without a credit card
Become an authorized user on one of your parents' cards
This doesn’t have to be a parent, but that’s typically the easiest route. By becoming an authorized user on a parent's credit card, your credit will slowly build as they make on-time payments. You will be held accountable for any spending you do on the card by your parents, or whoever holds the card you’re authorized on.
Get a cosigner
Typically, this would be for an auto loan or a student loan. However, a cosigner's good credit can help you secure a loan with better rates than you could get on your own. Better yet, this helps build your credit.
Check out this article if you're looking for more information on what credit score is needed to get a student loan.
Note: even with a cosigner you’re still responsible for making payments.
If you fail to make a payment, your cosigner is on the hook for making the payment — and that can affect their credit. Being held accountable by someone you know personally can be a strong motivator for keeping your finances in check.
Start making payments on your student loans
No one looks forward to making these payments, but there is a benefit to starting early. Your loans are deferred while you’re in school. This means there is no minimum payment.
By making small payments every month you begin to build your credit and reduce the amount of interest you'd have to pay in the future.
While this is a slow method, it’s better than doing nothing to build your credit. Plus, you’ll be setting yourself up for success (and smaller payments) once you graduate.
Report any other bills you pay to the credit bureau
This can include rent or utilities, including water, gas, electricity or your phone. By reporting these bills
and paying on time, you’ll begin to build your credit over time.
Apply for a credit-builder loan
While this is not well known, some banks will allow you to take out a credit-builder loan. What happens is they put the money you “borrow” into an account and you make monthly payments to pay that money off. Once it’s paid off, they’ll release the money in the account to you. This establishes a credit history and score for you, with very little risk for either party involved.
How to choose a credit card
If you do feel ready for a credit card, this is a great way to build credit "quickly." I say "quickly" because credit is most heavily affected by your history. However, lenders do take into account that everyone has to start somewhere.
If you are ready to have a credit card, you have a few options to consider:
1. Student credit cards
This is a great option for college students because that is exactly who these cards are designed for: students like you who don’t have any credit. Many of these cards come with promotions and rewards. The downside to student credit cards is that they have low credit limits and often extremely high-interest rates. This shouldn’t be a deterrent if your main goal for having a student credit card is to build your credit. Simply be sure to make your payments on time and in full every month to avoid the negative side effects of surpassed credit limits and high-interest rates.
2. Store credit cards
Store credit cards can be great because they require very little credit to open and may offer benefits like reward points, special deals, and coupons. They can be a terrific way for people with little to no credit to prove they can be responsible with their money. The downside to store credit cards is, like student credit cards, they typically have high-interest rates. You can avoid this penalty easily by making payments on time and in full.
3. Secured credit cards
These credit cards are a little different than your typical credit card because they require a deposit in a secure bank account. If you miss a payment, the company is guaranteed their money. While this can be a safer way to build your credit, make sure to go through a bank that doesn’t charge an annual fee.
Ways to build credit with a credit card
By using your credit card strategically, you can start building a positive credit score.
There are three critical points to remember:
- Avoid accumulating interest. It’s a myth that you need a balance on your card to build your credit. By paying off your balance in full every month, you avoid accruing interest, which can really dig you into a hole and get you into a bad cycle of always having debt.
- Make payments on time, every time. Late payments are the biggest detriment to your credit score. If you’re not going to make payments on time, avoid getting a credit card. Late payments will hurt your score worse than not having a credit score at all. Even if you only can make the minimum payment that month, be sure to make the minimum on time every time. Nothing wrecks your credit (for years to come) more than a late payment.
- Don’t overspend. This is a good tip for two reasons. First, by not spending more than you have, you can’t dig yourself into debt that you’re unable to pay off. Second, credit utilization (meaning how much credit you use out of what you have available) is a factor for your credit score. Try not to use more than 30% of your available credit to remain in good standing.
- For more ways to build credit as a college student, check out some more reasons to use a credit card.
While these cautions and tips for utilizing credit cards are all great advice, how do we put them into practice as college students?
Use your credit card for one specific cost
For example, only use your credit card when you buy gas for your car. This will help you keep track of exactly how much you have on your card and what you need to pay off that month. It’s also a necessity that you would spend cash on or debit anyways. It can also be a great way to track how much you spend on gas a month.
This same idea can be applied for other necessities, such as groceries.
Pay off your card as soon as you use it
This can be a great way to make sure you never carry a balance or are late with a payment. As soon as you get home from shopping or making a purchase, pay it off that very same day.
If you cannot pay the entire card off due to a larger purchase, always pay more than the minimum payment.
If you do not pay more than the minimum payment you will ultimately pay several times more with interest over time.
Utilize the card's app
Most credit cards now have apps where you can track your spending, make payments, and gain other insight right from your phone. This can help keep you from overspending and ensure you make payments ASAP (especially when incorporating the tip above).
Set monthly reminders on your phone or use auto-payments
Auto-payments can be a fantastic way of making sure you never miss a payment. As a college student, however, we know you might not always have the money in your bank on the same day every single month. If your worried auto-payments may overdraw your bank account, set up a monthly payment reminder in your phone. The key is to never press snooze!
Set a monthly credit card budget
This can be as low (recommended) or high as you’d like, so long as it’s below your credit limit. Simply determine how much you’re willing and able to pay on your card each month and stick to it. Once your card hits that limit for the month, don’t use it again and make your payment as soon as you hit that limit.
Leave your card in your dorm (in a secure spot, of course)
If you’re really worried about your self-control, or simply don’t trust yourself not to whip out your card four beers deep at the bar (no shame, we’ve all been there), leave your card in your dorm in a secure place. Not having it with you 95% of the time will help you avoid using it too much. Just be sure to make one purchase a month on it and make timely payments.
For more ways to make your money last you a little longer
, check out these tips.
If you've racked up your credit card balance, ask for a 'get out of jail free card' from someone you trust
We get it, it happens, especially when facing tough economical times. As a college student, and as a young adult in your new career, there's no shame in asking for help. The hardest part about credit card debt is the insurmountable interest rates that come with it. You could pay the minimum and barely even touch the principal amount of the debt, meaning you'll just be paying interest for a very long time.
One way you can surpass this obstacle is by asking someone you trust to help donate to your debt.
They can do this in a variety of ways including:
- Offering help to make bigger payments month over month
- Pay off your debt completely
- Loan you money helping you bypass paying the interest by just simply paying that person.
There are even more ways to utilize this method, but whatever you both choose will certainly increase your credit score by decreasing the amount of debt you carry.
Start building your credit score now
There are tons of other ways to establish responsible habits when using a credit card. Educating yourself on your credit, credit cards, and your finances is an excellent habit, and can really help you build credit as a college student — a great way to set yourself up for future success.