College is a time for many firsts: living away from home, meeting different people and learning new things. It’s also a time to start setting yourself up for financial success after graduation. Begin by establishing credit.
Why it’s Important
Having good credit helps you rent an apartment, get a loan or mortgage and even get a cell phone plan. Your credit score reflects your credit history. The most common is the Fair Isaac Corp. FICO score, which runs on a scale from 300 to 850, with 850 signifying the best credit.
Student Credit Cards
As paradoxical as it might sound, it takes credit to build credit. Issuers such as Harris County Federal Credit Union understand that students might not have the history it takes to get a credit card. If you earn income, you can apply for a student credit card on your own. If not, you might be able to get one as long as you have a co-signer, such as a parent, to guarantee that the bills will be paid.
With a slew of cards on the market, it’s hard to know which one to choose. An ideal first card has these features:
No annual fee. Some rewards cards charge yearly fees, but there are plenty with no annual fee. As a student, you’re probably strapped for cash, so there’s no need to pay extra charges if you don’t have to.
Getting paid to spend sounds too good to be true, but many student credit cards offer rewards for things students spend a lot on: restaurants, textbooks and entertainment.
Low rate. If you think you’ll carry a balance on your card, look for one that charges a low interest rate. If you know you’ll pay off the balance each month, you won’t have to pay interest, so it’s okay to get a card with a higher rate.
Use it responsibly. Once you have a card, you’re not off the hook yet. You have to use it correctly to build good credit.
Make prompt payments. Payment history is the largest contributing factor in your credit score. So pay at least the minimum by the due date.
Don’t max it out. How much of your available credit you actually use also affects your score. To keep your debt-to-credit ratio low, only use about 30% of your card’s limit. For example, if the limit is $1,000, only charge about $300 at a time.
Keep it open. Even if you aren’t using it, don’t close your account. This helps improve the length of your credit history, which is also considered in calculating your score.
Avoid multiple applications. Applying for a new card triggers a credit inquiry and can lower the average age of your credit accounts. A lot of applications over a short period of time can damage your score.
Diversify your credit. The types of credit you use contribute to 10% of your score. Credit cards, auto and student loans can help diversify your record.
Be patient. Building credit takes time, but if you start as a student and compile a good track record, you’ll be well equipped by the time you graduate.
Teddy Nykiel, NerdWallet