Why You Should Establish Credit While You’re Still at School
Graduating soon? Entering the “real world” may be easier if you have good credit, as your credit can influence huge life events such as what home or car you can get.
Because it’ll likely play such an important role in your life, you may want to begin establishing your credit while you’re still in school.
Here’s why getting a head start on your credit can really matter.
You’ll start building your credit history early.
Brent Dickerson, CERTIFIED FINANCIAL PLANNER and founder of Trinity Wealth Management, says, “One of the factors credit scoring models typically take into account is your length of credit history, so starting earlier can help improve the way you look to creditors.”
This means that establishing a long, clean record of on-time payments can set you up for success. Each on-time payment is an indicator to lenders that you can be responsible with their money.
It’s important to start building your credit before graduation if you can because if you’ve never had a loan or line of credit, you may not be scorable yet — in other words, there may not be sufficient data in your credit file to give you a credit score. At a minimum, the Fair Isaac Corporation (FICO), a credit scoring company, requires that you have a credit account that is at least six months old before you can be scored.
If you wait to start building credit, you may miss out on some of the benefits of having a good credit profile while you start to establish your credit after graduation. As explained below, this can affect the pillars of your post-graduation life – such as your job (in certain states), car and home.
Good credit may make it easier to get a job, car, or apartment.
Looking for a job? What you may not know is that some employers in some states can pull applicants’ credit history as part of the background check. A good credit history could differentiate you from other candidates – and if you’re considering applying for a financial job, such as one at a bank, a good credit history may be a requirement.
Likewise, auto loan lenders could look more favorably at your application if you have a strong credit history. You may save hundreds or even thousands of dollars in interest if you have a good credit profile — according to this calculator, a $12,000 auto loan paid over 48 months at a 7 percent interest rate could cost $777 more than the same loan at 4 percent.
In addition, if you’re planning on renting an apartment, landlords and property managers may examine your credit before approving (or declining) your application. Some may not rent to you if you have poor (or no) credit history. Others may be willing, but only if you have a co-signer or you pay a larger security deposit.
And if you do move into an apartment and want it to have heat and running water? Credit may affect this aspect of your life as well — utility companies may require an initial deposit if you have poor credit.
How to Set Yourself Up for Success
Getting a line of credit in your name is an important first step to building credit, but it can also cause problems if you don’t know how to use it responsibly. Learn and implement healthy credit practices now and you’ll be on your way to building a strong credit profile.
There are six factors commonly used to determine your credit score, but in general, the most important are consistently making on-time payments and keeping your total balances low in relation to your total limits. In short, you can aim to:
- Always make on-time payments, even if it’s just the minimum amount due.
- Only use a small percentage — generally less than 30 percent — of your total credit limit across all of your credit cards
- Pay your card’s balance in full as often as you can to avoid paying interest.
You may be able to automate some of these best practices, which unfortunately can’t be said of other healthy habits, like regular exercise. For example, you may be able to sign up to automatically transfer payments from your checking account to your credit card equal to the card’s minimum amount due or total statement balance. In addition, see whether your card will allow you to set up an email or text alert for when the card’s balance reaches a particular dollar amount, such as a third of the card’s limit.
How to Get Started
Many credit card issuers market specific credit cards to students, which could be a good place to start, as you may be more likely to get approved, even if you have a limited credit history. However, you should keep an eye out for high interest rates and fees.
If you can’t get approved for a card of your own, consider asking a parent to add you as an authorized user on one of his or her cards. As an authorized user, account activity – good or bad – will usually reflect on your credit report as well.
Terrance Martin, Ph.D. in personal financial planning and an assistant professor of finance at the University of Texas, suggests getting added to the card with the largest credit limit and longest history of on-time payments. Before making the request to get added, call the card issuer and ask if they’ll report the card under your name. Otherwise, the activity may not be added to your credit file.
A third option is to open a secured credit card backed by a deposit. You can build a strong history by using the card for a small purchase each month and paying the balance in full.
Building your credit from scratch may seem daunting, but everyone starts at the same place. It’s important to start establishing your credit as early as possible, as a strong credit profile can make getting a job, apartment or line of credit easier and could result in significant savings in the future.
Assistant Professor of Finance Univ of Texas at Rio Grande Valley
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Whether it’s finding an apartment, applying for a new credit card or getting a car loan, your credit can make a big difference. If you’re not sure where you stand or how you can start building your credit, Credit Karma can help. They’ll hook you up with your scores, reports and a whole bunch of helpful tips, and it’s all totally free.