Years ago, when I first started college, I signed up for a Citi credit card because it offered 1 percent rewards, no annual fee, and a few other small perks I never used and can't even remember. I was a freshman in college and I foolishly signed up at a table outside my student union. I was fortunate in that I was able to get the card and start building my credit history as early as possible, when I was 18, and that it wasn't an identity theft scam! Years later, looking back, I realized how careless I was even though everything turned out fine.
It's scary how important your credit is these days. Once relegated to just loans and other credit instruments, your credit score is used by everyone from landlords to cell phone providers to insurance companies. Luckily, the best time to start building your credit is while you're still in school. Here are a few smart credit moves students can make to help build their credit:
Get a Credit Card
Your credit score depends on a variety of factors, but one of the most important is your credit history. If you don't have any debt or any credit, you currently have no history. No history means your score will be relatively low because the bureaus know nothing about you. Unfortunately, this is bad because so many places uses credit score as a proxy for risk. When you go to rent an apartment, the landlord will request part of your credit to assess your rentability. When you try to get a cell phone, they'll do the same. The best way to start a credit history is by getting a credit card.
There are two ways to do this. The first and easiest way is to ask your parents to be added as an authorized user on one of their cards. By doing that, you instantly get that history added to your own history. Your parents don't even need to give you the card, though they might just for use in emergencies. If you don't want to ask them to add you or you can't, you can always apply for your own. I recommend applying for student credit cards, which are more forgiving on income and credit requirements, or store-branded credit cards, which often have low limits and low credit requirements as well. When you get the card, use it sparingly—very sparingly. Never carry a balance and don't pay a cent of interest.
Use Credit Responsibly
When you do get a card, you should use it sparingly and pay it off each month on time. By doing this for a year or two, you're building a history of responsible credit use and improving your score. Getting a great credit score isn't necessarily difficult, it just requires that you stay on top of your responsibilities and pay off your debt whenever it's due. Don't exceed your credit limit, don't carry a balance from month to month, don't use cash advances, and set up a good system for tracking all of this. When you exceed your limit, carry a balance, or use a cash advance, you're going to get hit with expensive fees. Don't let carelessness cost you money that you need for other expenses.
Monitor Your Credit Report
The Fair Credit Reporting Act gives everyone the right to see their credit report from each of the three credit bureaus every 12 months. Go to AnnualCreditReport.com and request your report from Experian, Equifax, and TransUnion. If you haven't had much credit in the past, reviewing your report should take only a few minutes, since there won't be much verification involved. If you're lucky, the credit report will be 100 percent accurate. If you're not as lucky, you'll see a few mistakes. Follow the protocol outlined by each bureau for fixing mistakes and get those resolved as soon as possible. Fixing a mistake might take a few months, depending on the complexity of the problem, but it'll be worth the investment down the road. Once you've checked and fixed any problems, you only need to review that report once a year for errors.
Don't Fall for Giveaways
Years ago, credit card companies would set up tables on campuses and give away T-shirts and other pieces of junk for your application. Oftentimes these people would actually be freelancers, collecting applications and then mailing them off to collect their commissions. There are two reasons why you should avoid these people (who are now banned on many campuses):
1. Beware of identity theft. If you ever apply for something that requires you to put down that much personal information, do it through a secure form online or in the presence of the company who needs it. Putting your name, address, Social Security number, and income on a piece of paper that gets thrown in a stack on a table is a mistake.
2. That stuff is junk. How much is a T-shirt worth? $10? $15? How much is a frisbee? $2? You're selling yourself for a few bucks for a credit card that might be junk. Does it have an annual fee? What rewards does it offer? Why do you want it? If the answer is “I need a t-shirt,” walk away because it's a mistake to get that card. All it takes is one late fee or not being aware of an annual fee to turn that free T-shirt into a $50 T-shirt. Who pays $50 for a T-shirt?
Don't Pay an Annual Fee
Unless you're getting something extremely valuable in return, there's no reason why you should pay an annual fee. If you have horrible credit and the only way you can rebuild it is with a secured credit card with an annual fee, then you're getting something extremely valuable. If it's a travel card and you can earn incredibly great rewards, then you are getting something extremely valuable. If the card is ho-hum and has an annual fee because the credit card company isn't satisfied with earning a few percent off your spending (that's what they charge stores), then pass on it. A credit card should enrich you, not the other way around. They should shower you with rewards, and you should pay them absolutely nothing.
These are just the smart moves students can make to establish and build their credit. They're part of a larger set of 40 money tips for college students that tackles everything from banking to earning money to saving and investing.
Jim Wang writes about personal finance at Bargaineering.com. When he's not tackling money issues, he's usually looking forward to his next vacation and writing about it at Wanderlust Journey.