When you are a young student, it is a perfect time to start building your credit. A “credit score” measures the chance that a loan will be paid back by the borrower. In other words, it provides lenders an idea of the likelihood that their money will be returned to them…in full and on time. To establish and maintain a good credit score requires that you demonstrate a track record of responsibility and trustworthiness with someone else’s money.
Strategies for Students to Build their Credit Score:
- Open new credit accounts only when necessary. Don’t open accounts strictly for an immediate percentage off the items you’re purchasing. You may save now, but it could cost you in the long run.
- Always be on time with your bills. ALL OF THEM. Late payments–even if only by a few days–negatively impact your credit score. All bills should be paid on time, including utilities.
- A missed payment isn’t the end of the world, as long as you make up for them. While you should try to never miss a payment, a continual string of good credit behavior will work to negate the effects of past credit incidents. The more you pay on time, the more your score increases and past credit issues become less relevant.
- Trouble making payments? Contact your creditors or reach out to an established non-profit credit counseling agency. While this will not immediately fix your score, it can lead to sound financial planning and a future of on-time payments to get you back on track to an improved credit score. If you start a Debt Management Plan (DMP) through a credit counseling agency, you may see a dip in your score initially due to the closure of credit accounts.
- Always maintain a low credit balance on accounts. High outstanding debt can hurt your score.
- Pay off credit debts rather than moving balances from card to card. The easiest way to increase your credit score is to pay off the debt rather than falling into the endless loop of transferring balances from card to card.
- Charge only a recurring bill to a credit card. Initially, only use your credit card for a couple recurring bills each month. For example, a cell phone invoice would be perfect.
- Always keep credit card balances below the offered credit limit. Try to use less that 30 percent of allotted credit lines. Make loan and credit card payments on time and your credit score will increase. People with no credit history pose greater risk to lenders than those with an established, solid credit history. So make yours a priority.
- Become an authorized user. Assuming your parents have good credit themselves, ask them if you can become an authorized user on their credit card account. When their credit activity is reported, it will appear like it was your own.
- Don’t close unused accounts simply to raise your score. This won’t help raise your score in the immediate short term, because credit scores only look great if the accounts have been managed responsibly for prolonged periods of time (5 years or more).
- Don’t open numerous accounts in a brief period. This is important to all borrowers, but especially new credit users. Rapid account acquisitions can appear as risky to many lenders.
In short, it is vital that young students establish and maintain a good credit score as early as possible in life by being a diligent, responsible borrower. If you can develop good credit while still in school, it is possible to graduate with a score in the high 600s, putting you in an excellent position to purchase a new car or your first home.