College is a time for gaining new skills, making lasting friendships and discovering your direction in life. It’s also an excellent time to begin establishing credit. Here’s what you need to know to establish credit scores that will bring lasting benefits.
Credit scores 101
Lenders use credit scores as a measure of your creditworthiness, or how likely you are to pay back money that you borrow. Each of the three major credit bureaus (Experian, TransUnion and Equifax) use information they gather about how you pay your bills to calculate a three-digit score, which may range from about 300 to 850.
These three scores may differ slightly from one another because the bureaus each has its own unique formulas. But they’re all based on these factors:
- Payment history: Do you pay your bills on time?
- Length of credit history: A good track record is important, and a lack of history is considered about as risky as a poor one.
- Credit utilization: This is the ratio of how much you owe compared with the amount of credit extended to you.
- New credit: Opening a lot of new accounts over a short period can hurt your score.
- Credit types: A mix of debt types raises scores.
Why worry about credit now?
When you apply for financing, credit scores are a strong factor in the approval process. But these scores don’t just determine a yes or no answer; high scores result in lower credit card and loan interest rates as well as reduced costs for points and fees. The impact becomes really apparent with larger loans such as mortgages, where top scores can translate to tens of thousands of dollars in additional buying power.
Even if financing isn’t a concern just yet, lenders aren’t the only ones watching your credit scores. Landlords and insurance companies also check credit, so low scores could cost you that dream apartment — while having excellent credit could get you a sweet discount on your insurance. Credit scores can also affect which cell phone plans you’re offered, whether a cash deposit is required for utility hookups and even what you’ll pay for your next vacation.
Getting that first credit card
Responsible credit card use is one of the best ways to establish good credit. The challenge is that many major credit cards require solid credit for approval. Financial institutions like West Community Credit Union might be willing to grant major credit cards to college students under age 21 if they can prove they have the means to pay, or can get a co-signer to back them.
Another possibility is to become an authorized user on the credit card of a family member or significant other who you know has a good credit record. When you’re an authorized user, you have access to a credit card and the payment history will show up on your credit record, allowing you to establish credit.
Raising scores with loans
If you happen to have a student loan, the upside is that it’s another effective way to build good credit, and today’s low rates and generous repayment terms help make these loans an affordable option. Keep in mind, though, that it only makes sense to take out a student loan if you actually need it to pay for your education.
Small, secured auto or personal loans also work to establish credit. These loans require an amount equal to the funds borrowed to remain on deposit.
Earn your best scores
Smart financial habits will significantly boost your credit scores during your college years and beyond:
- Pay all bills on time: If necessary, set up text reminders or automatic payments.
- Keep balances low: Aim to charge no more than 30% of your available credit.
- Diversify: Credit bureaus like a healthy mix of debt, which might include a credit card, student loan and retailer installment payment plan.
- Limit inquiries: Since multiple credit checks in a brief can lower your scores, don’t apply for more credit than necessary. Be aware that other activities like renting a car or applying for an apartment may also trigger credit inquiries.
Just as you watch your GPA, it’s wise to monitor credit regularly to catch any problems that might get in the way of rising scores. The law entitles you to one free, detailed credit report from each of the bureaus annually, which can be ordered online at AnnualCreditReport.com or by calling 1-877-FACTACT. Credit union members can view their daily updated credit score for free within Online and Mobile Banking.
Accurate knowledge, sound financial habits and an early start can lead to a lifetime of stellar credit. The access to top financing, housing, jobs and little extras this brings can help you enjoy a life experience that’s well above average.