There’s always more going on with credit than the money that it provides for spending. Anytime you borrow money it will have an impact on your credit profile, and that will include your credit score. And you will want to build your credit score while you are still in school because it will give you a leg up when you get out.
Consider the following:
- It takes years to build a good credit score
- You will probably need credit as soon as you graduate
- A good credit score will help when applying for employment
- A good credit score will enable you to borrow under more favorable terms
- It can take years to overcome a run of bad credit
Many students have poor credit by the time they finish college. It comes from living on a shoe string, and from not fully understanding the consequences of either not paying on time, or borrowing too much. Decide that you will be the exception, and resolve to graduate with a high credit score. Your life will go better if you do.
How do you build your credit score while you are still in school?
Take out one credit card, and pay the balance immediately
Unless you have steady income you’ll probably need a cosigner in order to get even one credit card. The cosigner will almost certainly be your parents. Even though the card will also be in their names, your experience with it will appear in your credit profile. How you handle it will be the start of your credit score.
Your first card might come with a very small credit line, say $2,000, or even $1,000. Once you get the card, use it to make a small purchase – no more than $200. Either pay the balance immediately, or pay it off in two or three installments. Don’t charge anything else until you’ve paid off your first charge.
You can do that sequence several times, until you get comfortable with the flow of charging and paying quickly.
Once you have one card established, go for a second
Once you establish yourself with one credit card, you can go for second. Follow the same sequence with the second card as you did with the first, but be careful not to carry balances on both cards at the same time. What you want to do here is make use of both cards without carrying a balance on more than one at a time.
Once you are comfortable with two cards, you can go for third – but don’t go for any more than three in total. The credit repositories prefer that you have at least three credit references from traditional lenders such as credit card issuers. Be sure to use all three cards, but never more than one at a time. This will give you the three references that you need without ever overwhelming yourself with credit obligations.
Always pay on time, and always pay a little extra
Once you have your credit lines, it is extremely important that you always pay on time. Building credit isn’t just a matter of building credit lines, but of proving that you can service them in a responsible way.
That will mean paying each on time every month. That means never being late even once! This point is critical to remember. With three or fewer credit lines, a single 30 day late can drop your credit score into the “poor credit” range. Once you drop that low, it will take an awful lot of good credit to get you back into acceptable range.
Also, if you can always pay a little bit extra. Though it doesn’t always reflect in credit scores, a borrower who consistently makes minimum payments is seen as less solid than one who pays extra. And it’s just a good habit to get into.
Never max-out your credit lines
One of the factors that has the greatest impact on your credit score is what is known in the credit industry as “credit utilization”. That’s the percentage of outstanding debt to total credit available. If your total credit line is $2,000, and you have $1,200 outstanding, your credit utilization on that line is 60% ($1,200 divided by $2,000).
80% credit utilization is considered the beginning of the danger zone by the credit repositories. 80% or higher will have a negative impact on your credit score. Below 80% has a positive impact. The lower this percentage is, the better it will affect your credit score.
Never default on any obligations
Even apart from your credit cards or any other formal loans, you should never default on any other obligations. This can include rent payments, utility payments, store charges and medical debts. Though those vendors may not report your credit experience when it is positive, they are very quick to report it when something goes wrong.
It is unfortunate that with such vendors that your experience will never impact your credit in a positive way, but it can have a very negative effect if you have a charge-off or a large past due balance. When you’re trying to build your credit score, you must take all obligations very seriously.
Have you started building your credit score yet?
