When you are a college student, it is a good time to try new things and a perfect time to open new chapters in your life. One of those chapters is going to be planning for your financial future. Whether that future means starting a new business, buying a home, or paying off newly-inherited student loans, you are going to need a high, secure credit score to get the financial future that you want. Here are four ways that you can start working towards that bright financial future today.
Get a Credit Card
This is one of the easiest ways to start building up credit for yourself. Credit cards work as an open-ended loan, meaning that they have no set end date and that you can continue borrowing from. Your payments do not necessarily pay off the total principal every month, either. It is advised that when you take out a credit card, that first you shop around and make sure that you are getting a credit card that is suited for your unique needs as a college student. For instances, some cards offer cash back on gas, travel, or food expenses. Those credit cards will help you not only build stable credit, but also reward you in the short-term by offering you cash back for purchases that you already regularly make.
Furthermore, when you decide to open your own credit card, be sure to set a credit card limit where you can pay the balance in full at the end of every month. That way, you don’t have to pay the interest on old principal for the month that follows, and you save money. You should also only ever spend about 5 or 6 % of your credit card’s limit anyway. This is because FICO analyzes your credit-utilization ratio, which is how much you spend or owe the credit card company versus the limit of your credit card. People with the highest credit scores tend to be people who score in that 5 or 6% range, so that is also something to keep in mind when initially signing a credit card contract and entering into negotiations about your limit.
Take Out a Small Loan
While a credit card is a good start as an open-ended loan, taking out a small loan of another type at the same time will also help strengthen your credit score. This is because another factor of your credit score is the variety of types of credit that you utilize. Lenders will agree to lend you more money if they see that you are responsible with multiple types of credit. The more types of credit that you have, and the more that you pay in full and on time, the better that your credit will be in the long-term.
This is not the time to take out big-ticket loans just for the sake of opening a trade line and increasing your score. This is the time for small, unsecured personal loans that can help you with smaller purchases, like appliances and small campus expenditures that may come up in college life. If your score is too low to start with a personal unsecured loan, then you can also always take out a small secured loan as well. These will require some form of collateral to compensate if you miss out on payments, but that can also serve as motivation for you to pay your loan so that the lender does not take your collateral.
Hold Off on Large Purchases if Possible
This places emphasis on keeping a low credit utilization ratio. Lenders examine that ratio to make sure that you do not get into debts that are over your financial capabilities, and to see how good you are about paying those debts. Big ticket items like houses and luxury cars can wait until after you establish a secure credit score and graduate from college.
Another reason to hold off on these extravagant purchases is because the biggest aspect that FICO considers when creating your credit score is your financial history. Not just the length of that history, but whether or not you paid debts on time. If you purchase something that is beyond your financial means and you find yourself unable to pay, then that is an almost guaranteed path to bankruptcy, and then you will have to start this credit-building process all over again, but with the added pressure of bankruptcy shadowing everything that you’re trying to accomplish.
Don’t Co-sign for Your Friends and Family
Cosigning means agreeing to enter into a loan or credit card with someone that you trust so that, in the event they fall behind on their payment plan, you assume responsibility for the debt. You do not have the financial stability as a college student to be able to take on the responsibility of being a co-signer, even if you have perfect credit. While you may have read that cosigning can help improve your credit score, this is really only the case after you have an established line of credit.
While this sounds selfish, you should only focus on your own financial future when in college. You have a lot of options before you, and you assume the risk that cosigning will take some of those options away. It is in your best financial interest to wait to help out your friends and family until after you have a solid financial plan and your feet firmly planted in the ground in terms of credit and monetary security..
With these four tips in mind, you can start building up a solid line of credit that will carry you through the next few years of your financial journey. Whatever path lies ahead for you, a good credit score will get you there faster than any amount of presumptuous spending that you want to do right now. Credit cards and small loans will especially help you not only start your credit on a good note, but enable you to have the financial freedom you need to live the life that you want through your college days, and for the rest of your life.