Good credit opens up a world you may not have known existed, like Platform 9 3/4 did for Harry Potter.
If you jump on the credit-building train at 18, you’ll have an easier time renting an apartment, getting a car loan and setting up your own cellphone plan when you graduate (though I can’t promise you’ll find butterbeer, like Harry did, at your final destination).
But credit also makes it disturbingly easy to cover the eight pizzas your roommates decide to order.
While independence is your reward for having good credit, not everyone is ready to build it responsibly in college. Know yourself, and choose a method that won’t torpedo your goal as soon as you start.
WHY YOU NEED CREDIT
A quick primer: Your credit score shows lenders, landlords and financial institutions how likely you are to repay a debt or follow through on your commitments. After you start using credit, you’ll receive a score on an 850-point scale. In general, a good score is 690 or above, but know that it will take time to get there. A score of 650 to 699 “could be considered a win” if you’re in college and you’ve been building credit for a year, says Beverly Harzog , author of “The Debt Escape Plan.”
Having good or excellent credit means:
– Lower interest rates on credit cards, car loans, mortgages and private student loans
– Eligibility for premium credit cards with fancy rewards
– More easily qualifying to rent an apartment
– Access to utilities without a deposit
– Cheaper car insurance in most states
It can take six months after opening credit accounts to see your score. Many banks, credit cards and personal finance websites show their members free credit scores.
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HOW CREDIT WORKS
The factors that most influence your score are whether you’ve paid bills on time, how much credit you’re using and how long your credit history is. When you’re in the process of building credit, avoiding negative marks — like late payments — is your first priority.
Rent payments generally won’t affect your credit — unless you don’t make them, which could hurt it. But making student loan or car payments on time will elevate your score. Keep credit card balances low, and don’t carry a balance from month to month, even if it’s small. Consider using the card to make one recurring payment, like your cellphone bill, says Billy Hensley, incoming president and CEO of the National Endowment for Financial Education. Set up autopay from your checking account to cover it.
HOW TO BUILD IT
Credit cards probably come to mind first when you think of credit, but they’re just one way to show you can pay your bills on time. And they’re not for everyone.
There are some credit cards out there just for students, but they can be hard to get approved for. Instead, you can become an authorized user on your parents’ card, which means they’ll still be responsible for paying the debt, or get a secured card, which has a low credit limit and requires a deposit upfront.
Before you get a credit card, Harzog says to ask yourself these questions:
– Do you have a checking account now, or when you were in high school?
– Are you able to use a debit card without overdrawing your account?
– Do you save at least some money from each paycheck?
– Do you keep track of how you spend any income you earn?
If the answers are no, consider building credit another way.
I am a big fan of credit-builder loans. You get a small loan — usually through a credit union or community bank — and the money sits in a bank account while you make on-time payments, building a credit score. Once it’s paid off, the money is yours.
In the end, managing your money sensibly will naturally lead to a strong score.
“It’s far more important to focus on paying bills on time (and paying the credit card bill in full every month),” Harzog says, “than it is to focus on attaining a specific number by graduation.”