As a college student who is independent for the first time in your life, it can be hard to establish a secure line of credit, especially if you have little to no experience with credit or not with finance in general, and it can seem like a scary road ahead. These are some financial planning steps that you can take as a freshman in college that will help you build up a good credit score.
Open a Credit Card
This is the only way to start building up your credit score without having any credit foundation whatsoever. More than likely, it will have to be a secured credit card, meaning that it is supported by a cash deposit that also serves as your credit limit. While this sounds restricting, there are cards out there made especially for students that can help by giving you cash back on certain purchases or by eliminating certain fees that a more traditional card may have. You will want to talk to your financial institution and see your credit card options before making a final decision.
It is worthwhile to note that this is not a credit card like the one that your parents have. In fact, these cards are supposed to be used only for the short-term until you can establish a stable line of credit and start raising your credit score. You should then work to transition to the unsecured credit card that your parents have that has more benefits than you you’ll have on your secured card.
Take Out a Small Loan
One way to build up credit is to take out a loan. When you take out a small loan, you need to pay it back, and this will offer the opportunity to show the credit bureaus that you are good at budgeting and prioritizing your finances so that you make your minimum payments, on time, every time. Future lending institutions will look at your payment history to make sure that you are not late with payments so that they know they can trust you with their money.
There are multiple options if you decide to take out a small loan, such as an unsecured personal loan or a small loan secured with collateral. Again, this is one of those things that you will want to talk to your current financial provider about because of the various options available to you. It is also worth mentioning that the loan’s payment plan that you’ll be able to maintain. For instance, instead of a lump sum at the end of every payment cycle, break down the payment into multiple deposits throughout the cycle so that it is more financially feasible.
Pay Off Your Total Credit Card Balance Every Month
When you open your first credit card, it is especially important to pay off your credit card debt in full at the end of every month. That way, you start developing good financial habits that will simply carry on as your limit gets raised and as you transition onto different types of credit. Furthermore, establishing this kind of relationship with your credit card company can be helpful in the event that you do miss part of a credit card payment, because then there will be a small remaining outstanding debt rather than a large one.
This is crucial mainly because your FICO score is largely determined by your financial history, so having one that has a solid payment plan that you always meet on time is a great way to start off. Furthermore, credit cards usually have some of the highest interest rates on accumulated debt, hence why they are one of the principal reasons that most Americans are indebted. That means that on top of the principal owed, you will have to pay an exorbitant amount of interest that you can simply avoid by paying it off in full each month.
Maintain a Low Credit Utilization Ratio
Put in simple terms, your credit utilization ratio is how much you owe divided by your credit card limit. That means that you want to keep your limit where it is, or increase it, but keep your debts to a minimum. A lot of people and credit analysts recommend utilizing only five percent of your credit limit so that you can stay on top of your debts, but also use your credit to a reasonable extent. Four to six percent is a safe range for people who have never had a credit card before.
This is also based solely on revolving credit, which is essentially your credit card and any other lines of credit that you have. All this means is that debts with predetermined end dates, like some loans, will not count against you for this rate. All of this is to say that you should try to keep your credit card debts to a minimum as often as you can.
Pay Your Bills On Time
This point stands to reiterate the importance of having a long, healthy financial history. When deciding who to lend their money to, the lender is looking for a person they believe will pay their debts on time, every time, over the person who lets their bills add up until they have no choice but to declare bankruptcy. Though this may seem like one of the most difficult on this list, all it takes is careful financial planning and attention to detail in order to make this be an easy reality that isn’t overwhelming after all.
If you start paying all of your bills in college, then it is not a skill you will have to learn later on in life, and you will end up thanking yourself for it in the end.
These are simple tasks that everyone can take, but that are especially accessible to college freshmen in order to improve their scores and start building a solid line and history of credit that will carry them into the future. With a good credit score and a solid education, you are bound to go far in life, so start taking care of your credit today.