Key Points:
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Because your credit score may impact where you live and work, the sooner you can start building credit history, the better.
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You can start building credit history through the responsible use of a student card or a secured card.
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You can practice good credit management by paying your bill on time and keeping credit card spending low.
Having a good credit score can impact many areas of your life, including where you work and live, and if you may be approved for a new line of credit, like a credit card. The good news? It’s never too early to start establishing a credit history.
Importance of building credit as a college student
Your credit score can influence many different areas of your life. While having no credit history isn’t the same thing as having poor credit, a lack of credit history or a low credit score can affect your ability to buy a car or rent an apartment.
If you build your credit history while you’re in college, you may be more prepared to make important decisions once you finish school.
Whether you live off-campus as a student or plan to rent an apartment after graduation, a higher credit score may give you more choices. It can be harder to get an apartment with no credit history or poor credit unless you have a cosigner. A low score may also make it more expensive to rent if the landlord requires a larger security deposit to get approved.
Some jobs may require a credit check before starting your role. Things like making payments on time can translate to meeting your work deadlines, and low debt could mean you’ll be responsible about company finances.
You might not be considering buying a home anytime soon but building a good credit history will help you if you decide to purchase one in the future. It’s easier to get a mortgage (or home loan) if you have a good credit score.
A good credit score may help you qualify for an auto loan and help you get a lower interest rate. In general, the better your credit score, the lower your interest rate will be, and a lower interest rate usually means a lower monthly payment.
Ways of building credit as a college student
One way of building a credit history is with a student card. Student credit cards are made for college students. Student cards typically have low limits and come with rewards programs that may help students earn rewards on their everyday purchases.
Another option is to apply for a secured card. A secured card is like any other credit card, but your credit card company requires you to put money down as a deposit. Your deposit is usually equal to your credit limit. For example, if you put down $200 to open a secured credit card, your credit limit will typically be $200 too. It’s crucial that you make regular, on-time payments on your secured card and keep usage low because most credit card companies report your activity on secured cards to the credit bureaus.
Did you know?
A Discover
® student card lets you earn great rewards while you build your credit with responsible use.
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Things that can damage your credit as a college student
Using your credit card as income
It’s important to remember that while credit cards might help you pay for things during the month, they’re not a second source of income. If you have a $1,000 credit limit, it isn’t a $1,000 payday. You will eventually have to pay the money back.
You may be responsible for fees that come with your credit card, on top of repaying the purchases that you make with it. For example, some credit cards have an annual fee or foreign transaction fee charges (if you use your card in countries other than the United States or purchasing from a merchant outside the U.S.) that you may also have to pay. The good news is that Discover has no foreign transaction fee and no annual fee on any card.
It’s best to only make purchases on your credit card that you can afford to pay off at the end of the month to avoid interest charges.
Missing your credit card bill due date
It can be challenging to keep track of your payment due date when you are new to credit cards or have multiple credit cards. Your payment history makes up 35% of your credit score, so it’s important that you pay your bill on time.
If you miss even one payment, it can impact your credit rating. If you continue to miss payments, you may seriously damage your credit score and incur late payment fees.
Maxing out your credit card
The cost of college is expensive, and not just tuition and student loans. As a college student, you might also have school fees like housing, transportation, technology, and more. For many, it may seem easy to charge everything on your student credit card. But you run the risk of maxing out your card and carrying too much credit card debt. This isn’t a great way to build credit history.
Maxing out your card means that you’re at or near the credit limit for that card. For example, if you owe $500 on a card with a $500 limit. And even if you don’t spend all of your available credit, when you carry a high balance on your credit card you also put your credit utilization ratio at risk. A good rule of thumb is to use less than 30% of your available credit on any credit card you have.
Credit card debt is the balance owed across all your credit cards and can become a problem when you have more debt than you can afford to pay off. If too much debt leads to late payments, it could hurt your credit score. And a poor credit score can lead to a penalty interest rate, which can make your credit card debt even worse.
Tips to manage your credit as a college student
Don’t apply for too much credit
Student credit cards or secured credit cards start with a lower credit limit. While it can be tempting to get more cards to increase the amount of money you can spend, it’s a good idea to limit the amount of credit and number of accounts you have available to you.
For one thing, it’s easier to keep track of your payments and avoid credit card debt when you have fewer cards. Secondly, every time you apply to open a credit card account, it may result in a hard inquiry on your credit report. Too many new account inquiries on your account can be a red flag—lenders may think that you’re taking on more debt than you can manage.
When you pay your credit card bill after the due date, you may incur late fees and other penalties. Additionally, your credit card company may report these late payments to a major credit bureau which will have a negative impact on your credit score. To help make your credit card payment on time, you can set up automatic credit card payments as your credit card issuer allows.
Keep your credit card use low
You should keep your credit card usage (credit card utilization) low, preferably under 30%.
Monitor your credit card account
You’re more likely to keep track of when your bill is due, how much you’re currently spending, and the charges you make on your account when you monitor your credit card account. For most credit card companies, you can easily view your account online or by mobile app.
Another important reason to monitor your account is to be aware of any unusual activity. Unfortunately, credit card fraud can happen. You’re more likely to catch and report fraudulent charges when you regularly check your credit card account activity.
Your credit report is a document that gives a history of your credit activity. It’s important to check your credit report to get an idea of your credit history and help you detect anything that looks amiss.
Federal law allows you to receive one free credit report every 12 months from each of the three major credit reporting agencies. The Federal Trade Commission (FTC) reports that the three credit bureaus have permanently extended the program to include one free report per week.
You can request your free credit report at AnnualCreditReport.com (the only website authorized by the federal government). Additionally, you can ask for a free credit report within 60 days of being denied credit.
The good news is that as a college student, you can get a head start on credit by developing good habits. One of the most essential factors in building credit is the length of your credit history. So, the sooner you start your credit-building journey with responsible habits, the better off you’ll be.
