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So, How Should I Build Credit & Why Does It Matter?

As college students, we’re all stressed about managing our money and achieving financial independence. One of the first ways to start accepting responsibility for our money is by applying for a credit card — but many college students don’t know the importance of building credit, and how credit scores impact our future spending plans. Credit cards may seem like a newfound freedom to many of us, but misusing credit or damaging your credit score is detrimental in many ways.

If you’re wondering how and why you should build credit as a college student, look no further! I’ve got you covered with all the info you need to build your credit.

What is credit, and why does it matter?

Let’s start with the basics. Do you know what credit actually is? To put it simply, credit is your ability to receive money or resources with interest from a lender (such as a bank), without having to pay them back immediately. It’s very important to build good credit in college because it can help you to rent your own apartment, lease or buy a new car, and help you qualify for low-interest loans. College is the perfect time to start working on building credit for your future. Maintaining good credit shows lenders that you’re trustworthy and will consistently pay them back on time. Having good credit may also qualify you for certain jobs, as some employers require applicants to submit to credit checks. These are just a few of the reasons why it’s important to build good credit.

Photo by Christiann Koepke on Unsplash

What is a credit report?

Although most college students have at least one credit card, many of us don’t know what a credit report is, or how to read it. Once you start building credit, you receive a credit report. A credit report shows your past and present credit accounts and activity. Lenders use your credit reports to help them determine whether or not they should lend you money, and also what interest rate to charge you. Credit scores come from your credit report, and these numbers indicate what range of credit you have. Credit scores are commonly referred to as FICO scores, after the company that created the most widely-used credit calculation model, Fair Isaac Corporation. According to Nerd Wallet, a company that helps users understand personal finances, there are four credit score ranges:

Poor Credit: 629 or below

Fair Credit: 630 – 689

Good Credit: 690 – 719

Excellent Credit: 720 – 850

It’s very important to review your credit score and work on ways to improve it. Many credit card brands offer a credit monitoring program that helps you view and understand your credit score. There are many factors that are used to calculate credit scores. According to My FICO, there are five factors that are used to determine your credit score:

  1. Payment History (35%)
  2. Amount of Debt Owed (30%)
  3. Length of Credit (15%)
  4. Types of Credit Consumed (10%)
  5. New Credit (10%)

How to build credit as a college student

Now that we’ve reviewed what credit is and why it’s important, let’s move on to discussing some ways to build credit.

Open a credit card and pay bills on time

One of the easiest ways to build credit is by opening lines of credit and consistently paying bills on time. If you’re under 21, it may be difficult for you to open a credit card on your own, so you can get a co-signer (such as a parent or guardian) to help you qualify for a credit card. However, this doesn’t mean you should open multiple credit cards within a short period of time, as this may temporarily decrease your credit score. Remember, showing lenders that you’re dependable and responsible with money helps them determine whether or not they should lend you money. Missing payments or making late payments can be extremely harmful to your credit score.

Become an authorized user

If you can’t obtain your own credit card, consider becoming an authorized user on someone else’s credit card, such as a parent. Doing this can help you benefit from the user’s established credit history. However, make sure you check to see if the card issuer reports authorized user accounts to credit bureaus, and remember to make payments on time.

Make payments on student loans

Many college students have some type of loan to help pay for college, and repaying debt is a great way to build strong credit. Again, consistency is key when it comes to good credit, so make sure your payments are always on time! While it’s always good to build good credit history and show lenders that you’re dependable, paying off student loans while in college isn’t always an option for many students. That’s completely okay, because there are many other ways to improve your credit.

Rent payments

If you’re living off-campus on your own or with roommates, you’re probably paying rent. Consistently paying your rent is a great way to build payment history while in college. While your rent payments aren’t always reflected in your credit, there are many services that can help you report your rent payments to the three major credit bureaus. One such service is eRentPayment. However, most of these third-party services cost an additional fee and your landlord must be registered for the service, so keep that in mind.

Educating yourself on the importance of having good credit is the first step in improving your credit. Although the process of building good credit can seem daunting, remember that every small step counts! You might have thought that college students can’t build credit, but there are so many ways that you can start creating a positive credit payment history and help yourself become financially independent and responsible for the future.

Harshita is currently a junior studying Information Systems and Human Resources at Loyola University Chicago. She is passionate about traveling, hiking, cuddling her two cats, and discovering cruelty-free beauty.