A high credit score increases the likelihood that you’ll get approved for loans and other types of financing at a low borrowing cost. Although your credit score matures over time, there’s no reason why you shouldn’t start building credit while in college. In fact, developing your credit history early means you’ll be in a better financial position after graduation. Here are five strategies to help build a strong credit score as a college student.
1. Consider if you need student loans
Whether federal or private, student loans are a type of installment loan that can impact your credit. Installment loans have a fixed balance you have to repay, and monthly payment amounts are divided equally over a fixed time period. If you have a gap in funding and have exhausted your grant and scholarship offerings, explore the option of borrowing a student loan to help you start building your credit. Since student loans are credit-based accounts that are only accessible as a student, it’s a practical way to kick-start your credit profile early on—and certain loan activities on your account have multipronged benefits.
For example, having installment loans on your credit history, along with revolving credit later in life, provides a healthy credit mix that can help boost your score. This is true for FICO, one of the most widely used credit scoring models, which bases 10% of your score calculation on credit mix. Similarly, if you start making student loan payments while you’re in college, a track record of on-time payments can affect up to 35% of your FICO Score.
2. Ask to be an authorized user on a credit card
Taking out a student loan for the sake of developing your credit score doesn't make financial sense for everyone. For instance, if you’ve earned a full scholarship for school, there’s no reason to borrow student loans. Another credit-building opportunity to explore instead is adding your name as an authorized user on another person’s credit card. Typically, you’ll want to ask someone you have a close and trustworthy relationship with, like a parent, grandparent, or partner.
As an authorized user, you’ll be permitted to make purchases using the card. You won’t be the one obligated to make the payments to the account each billing cycle, but you can develop the habit of consistent payments by planning to pay the primary account holder independently. If the creditor reports the account’s activities to the credit bureaus (Experian, Equifax, and TransUnion), these activities will also show up on your credit history—just make sure the primary cardholder makes payments on time.
3. Get your own secured credit card
If you don’t have a relative who’s willing or able to add you as an authorized user, applying for a secured credit card could help. Secured cards undergo the same application process as a conventional credit card. If you’re approved, you’ll be required to make a small deposit into a separate account, generally ranging from $50 to a couple hundred dollars, depending on the company. The amount you’ve deposited becomes your secured credit card’s maximum borrowing limit. Then, you can make payments to repay purchases as you would with a traditional credit card. In the meantime, the creditor holds your deposit as collateral, in case you miss a payment or can’t repay your debt. As you make consistent, on-time payments, the creditor will submit your payment activity to the credit bureaus, and you should see your credit score improve. Some secured cards even let you “graduate” to an unsecured credit card after a period of responsible repayment habits.
4. Use a credit-builder loan
Credit-builder loans are specifically designed to be a path to starting credit for those who don’t have a credit history or as a credit rebuilding tool for those with low scores. This loan option is typically available at financial institutions like credit unions. If you’re approved for this type of loan, the lender will deposit the approved amount into a locked account; at this point, you won’t have access to the full sum of the loan. You’ll make monthly payments over a six- to 24-month period, which include a portion of the principal plus interest. The lender will keep the interest charges you paid but deposit the principal amount into your savings account with the same institution. Once you’ve completed all payments in the loan term, you’ll get the principal funds back. Your lender will report your positive repayment history to the credit bureaus, which will help increase your credit score. According to the Consumer Financial Protection Bureau, borrowers who opened a credit-builder loan saw a 24% increased likelihood of having their credit score increase.
5. Ask your landlord to report on-time rent payments
Thus far, it might seem like the only way to build credit is through some form of credit card or loan. However, there are a few surprising ways to improve your credit that don’t involve a financial institution, including rent reporting if you live in an apartment. Rent reporting is when your landlord discloses your rent payment history to the credit bureaus. This data provides insightful information about whether you’ve responsibly paid your rent each month and could help boost your credit score. Not all landlords provide rent reporting services to their tenants, but it’s worth asking about. According to rent reporting platform RentTrack, tenants who’ve had their rent payments reported to the credit bureaus saw an average credit score increase of 59 points over a 21-month period.
Building credit is an important part of your long-term financial stability. Finding ways to start early while you’re in college is smart and beneficial for after you graduate, as it will assist you some day when trying to buy a new car, a house, and more. Use any of these five opportunities that best apply to your situation and needs to get your credit history started and set yourself up for financial success.
Not sure what a credit score even is? Check out Financial Learning: Why Does My Credit Score Matter? by the same author for a crash course introduction to this topic!