When you’re in school, credit scores might seem like one of those things you don’t have time for in your busy schedule. But having a good credit score can help you qualify for credit cards and loans and receive good lending terms. And because part of your credit score is based on the length of your credit history, getting started now may give you a leg up on your finances.
What Is a Credit Score?
A credit score is a number that’s designed to predict how likely you are to pay back borrowed money. It’s based on the information in your credit reports.
But let’s back up for a minute. How do you even get a credit score, and where do your credit reports live?
The process starts when you borrow money, like taking out a student loan or credit card. Each month, your lender may send your account details to the three major credit bureaus: Experian, Equifax and TransUnion. These bureaus store the information and use it to create your credit reports. Credit-scoring companies calculate your credit scores using the information in your credit reports.
The result is a credit score that lenders (and certain others) can read at a glance. The two most well-known scores in the industry, the FICO score and VantageScore, range from 300 to 850. Within that range, scores are usually grouped into five categories:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very Good
- 800-850: Exceptional
Why College Students Should Build Credit
Building credit may not be high on your to-do list when you’re still in school. But after graduating, are you planning to get a job, rent an apartment or apply for a loan? Establishing good credit can help with all of these things. Lenders typically use your credit score to decide whether you qualify for a loan or credit card, and they’ll also use the score to set your interest rate.
Likewise, landlords can pull your credit reports while running a background check on you, and insurance companies in some states may factor your credit score into the cost of your premium. Utility and cellphone companies may even decide to waive a security deposit if you have strong credit. In some states, employers may be able to look at a modified version of your credit reports when you apply for a job. But they won’t be able to see your credit score.
How to Build Credit as a College Student
When you’re trying to establish credit for the first time, the process may seem a little backward: You need to have credit in order to get credit. Well, not always. There are still ways to build credit completely from scratch.
Become an Authorized User
If one of your parents or a trusted friend has a credit card, they can add you as an authorized user to the account. You’ll then “piggyback” off the credit history of the primary cardholder. So if they pay their credit card bill on time and keep their account balance low, you should see a positive history reflected on your own credit report.
However, the opposite is true, too. Your credit score may suffer if the primary account holder misses a payment or charges a high balance. So if you’re considering this option, choose someone who’s responsible with their credit card, and make sure the card issuer reports authorized users to the credit bureaus.
Open a Credit Card
Credit card issuers know it’s important for college students to build credit, so they may offer special cards geared toward this demographic. There are typically two options:
- Student credit cards are designed for college students who haven’t established a credit history. They typically come with student-related perks, like rewards for earning good grades, and lower credit limits to help you learn the basics of managing credit.
- Secured credit cards are geared toward people who are rebuilding credit after a financial setback. To open an account, you’ll need to provide a deposit, which protects the card issuer in case of default. These cards may come with a rewards program and opportunities for upgrading to a regular account.
The best card for you depends on which type you qualify for and whether you’ll use the features that come with the card.
Take Out Student Loans
A student loan is money you borrow to pay for school, and it can help you build credit as you repay the loan over time. These loans can also boost your credit by increasing your average account age and diversifying your account mix. You don’t need a credit check to get most federal student loans, so this is often how students start their credit journey. As with any type of debt, it’s a good idea to apply for a student loan only if you need the money and you’re reasonably sure you can make the payments after graduating.