Crazy as it sounds, your credit score may have more of an impact on your life than your college degree. Sure, on average, college graduates make $1 million more over their lifetimes than people who stopped at their high school diploma, but to make that million more, you first have to find a job and probably an apartment (unless your parents’ basement is particularly cozy). And guess what? Even if a bad GPA makes finding a high-paying job more difficult, your potential landlord won’t care about it.
A bad credit score, on the other hand, matters to everyone: employers, lenders, brokers, banks, landlords, credit card companies, insurance companies, even T-Mobile. Worse, many college graduates have no credit score at all: credit history makes up 35% of your credit score’s calculation, and if you’ve (understandably) spent the last four years using very little credit in favor of saving your money, you might not have enough of a payment history for FICO to generate a score.
So if you’re smart enough to go to college, you’re smart enough to understand that a) credit is important, and b) you have all the necessary skills to start building credit right now.
Apply for a credit card and use it intelligently.
The only way to get good credit is to build credit, and the easiest way to do that is by applying for a credit card. Find the card that’s best for you, like a student-friendly credit card with low to no annual premiums. According to our credit expert, Tom Tarkowski, you should also consider asking your parents to authorize you on one of their established cards: “Getting authorized on an existing card will help you build credit much faster than applying for a new card, as the payment history from an established card can be transferred to your own credit. Just make sure that your parent’s card was always paid on-time and is not maxed out upon authorization.”
Once you have a credit card or an alternative card, practice smart spending by treating it like debit or cash: if you don’t have the money in your bank account to cover an expense at the time of purchase, put the card down! Save your credit line for modest monthly expenses which you can easily pay off at the end of each month, such as streaming services (Hulu, Spotify, etc.), utility bills, groceries, and student loan payments.
Keep in mind that credit utilization (or amounts owed) makes up 30% of your credit score, and aim for a low credit utilization ratio by using 30% or less of your credit card’s limit. So if you have a $1500 limit on your account, your balance shouldn’t be greater than $450 at any point in time, which brings us to our next point!
Pay off your balance each month.
Paying off your credit card balance each month prevents debt from accumulating on your account and keeps your credit utilization ratio low. Additionally, late payments are likely to show up in your credit reports and negatively affect your score, so be sure to pay off your balance in-full and on-time.
Pay all of your other bills on-time.
Utility companies and landlords have the right to report late payments to the credit bureaus, and that problematic information will be incorporated into your credit reports and score. Paying all of your bills in a timely and efficient manner, on the other hand, will positively affect your score by keeping you out of debt and in the good graces of the FICO scoring model.
If you have any student loans, make sure to pay those on time as well, as late loan payments can have a devastating effect on your credit score. If you can, start paying off your loans while you’re still in college by paying the bare minimum each month; not only will this help you decrease the interest you owe upon graduating, it will also help you build a history of timely loan payments, which will look great to potential lenders when they check your credit reports and score.
DO NOT apply for multiple credit cards at one time.
Lenders and bankers see multiple credit card applications as a sign of financial trouble. To them, it signals that you need large amounts of credit on-hand in a short period of time, perhaps because you’re in a large amount of debt. In fact, this is so important to them that 10% of your credit score is based on New Credit, or the amount of credit lines opened in a period of time.
Make sure that you do your research before applying to a credit card so you only have to send out one application, and stick with that one card once you get it!
Basically, you should ALWAYS exercise caution and constraint when it comes to either credit or spending. And if you can cultivate financial discipline in your college years by using your credit card judiciously and paying your bills on-time, you’ll be well on your way to good credit for life!