College is a great (read: strategic) time to work on building a credit score from scratch. If you work on building credit while in school, you could graduate with a healthy credit score in the high 600s to mid-700s.
Coupled with a solid starting salary, graduating with a good or excellent credit score puts you in a great position to rent your first house or apartment and, eventually, make larger purchases like a new car or a first home. On top of that, you’ll qualify for the best terms when it comes to borrowing personal loans or opening credit cards.
How to build a positive credit history
Here are a few inexpensive things you can do to bulk up your credit report and build your credit score before graduating from college
#1: Learn how to use a credit card — the right way
You can start working on your credit score by opening a student credit card with a bank or credit union. Having a credit card can be risky — there are plenty of stories of students overspending or seeing their credit limit as “free money” — but opening a student card also gives you an opportunity to learn good credit-building habits. Here’s a simple strategy for building credit with a student credit card:
- Charge only a recurring bill like a phone bill or monthly streaming subscription to the card.
- Set up automatic payments to pay off the credit card bill on time and in full each month.
- Rinse and repeat for four years.
When selecting a credit card, you’d ideally choose a credit card that doesn’t charge an annual fee. You shouldn’t use the card for anything other than the recurring bill — and, if absolutely necessary, the occasional emergency. The recurring bill should ideally be less than 30 percent of a your total available credit. (Using as little as possible of your available credit helps you get a good credit score.)
Eventually, your credit score should reflect a history of consistent, on-time payments and will likely be in the good or excellent range. These are some of the best student credit card offers available now.
Con: High interest rates
While credit cards generally carry high interest rates across the board, student credit cards tend to have some of the highest APRs. The rate is high because students don't usually have much credit history, so lenders see them as risky borrowers and charge a higher interest rate to compensate for the risk.
Pro: Build credit without debt
Using the strategy described above — making a small purchase and paying it off each month — you can establish a healthy credit history without paying a cent of interest. Assuming you pay the bill on time and you’re using the card to buy something you’d purchase anyway, there’s no cost to this approach of building credit.
Con: Low limits
Limits on student credit cards are generally pretty low, as banks want to minimize risk of lending to an inexperienced borrower. A low limit makes it pretty easy to use more than the suggested 30 percent of one’s total credit limit. For example, 30 percent of a $500 limit is $150 — basically the cost of a textbook.
Pro: Access to an unsecured line of credit
Having a credit card gives you a line of credit to borrow from when you need to. This can be helpful if you can’t immediately cover all of your personal costs like books, food or an emergency. The student credit card is also unsecured, meaning the student won’t have to make an initial deposit to open the line of credit.
Con: Easy to make credit mistakes early on
A credit card comes with a lot of responsibility. Having a credit card can make it really tempting to spend more than you can afford (which results in expensive debt) or use a lot of your credit limit (which can hurt your credit score). Be prepared to exercise a lot of self-control if you get a student credit card, because it can take years to undo the damage caused by irresponsible credit card use.
#2: Become an authorized user
If your parent has good credit history, ask them about becoming an authorized user on their credit card. When you become an authorized user, your parent’s behavior with the credit card will be reported like it was your own.
Pro: A passive way to build credit history
If you use this tactic, you can build credit history while never having to actually apply for credit yourself.
Con: It’s not guaranteed to help
Not all credit card issuers report authorized user accounts to the credit bureaus, according to Experian. On top of that, not all credit scores look at authorized users the same. There are dozens of credit scores, each with their own algorithms, and some may not give an authorized user much weight in determining a score, according to Experian.
Con: Could easily backfire
While authorized users are not liable for debts on the account, missed payments or high credit card balances on the account could hurt you. If that happens, you can either file a dispute to have the negative information removed or contact the card issuer and ask to be removed as an authorized user on the card.
#3: Get a co-signer
You can thank the 2009 Credit CARD Act for making it more difficult to get a credit card before you’re 21. The CARD Act stopped companies from marketing credit cards to students on college campuses and made it so people who are younger than 21 must either have a co-signer, such as a parent or a guardian, or have an independent source of income to qualify for a credit card.
Pro: Allows a student who can’t qualify on their own to open a credit card
Lenders generally consider it risky to hand a line of credit to a college student with little or no credit history. By requiring a co-signer, lenders transfer part of this risk to someone else, giving you an opportunity to build your credit you may not have had on your own.
Con: Puts a co-signer at risk
If you go with a co-signer, you need to be very careful to only charge what you can afford to pay off in full each month. Both you and your co-signer’s credit scores will take a hit from any negative behavior like missed payments or high credit card balances. Asking someone to co-sign a credit application is no small request and can affect your relationship with that person. Be sure to set ground rules for the arrangement before agreeing to it.
#4: Get a secured credit card
If you’re unable to get approved for an unsecured credit card, you can try opening a secured credit card instead. A secured card can help prove your responsibility to lenders without a lender taking on much risk. You’ll have to put down an initial deposit in exchange for access to a line of credit on the card. Typically, the line of credit will equal the amount of the deposit. You can check out our roundup of the top secured credit cards for people looking to improve their credit scores.
Pro: A better shot at approval
Because the required deposit lowers a lender’s risk, you have a better shot at getting approved for a secured credit card over an unsecured student credit card.
Con: A required deposit
You will likely have to come up with $100 or more to put down as a deposit before a credit card issuer will approve you for the account. If you miss a payment, the lender can take your deposit. And because the deposit will likely serve as your credit limit, you won’t have much room for spending if you want to reap the credit-score benefits of using little of your available credit.
#5: Get a credit-builder loan
You can get credit-builder loan through banks and credit unions. When approved for a credit-builder loan, your loan is deposited into a savings account, but you can’t access the money until you’ve paid back the loan.
A credit-builder loan is good for students who want to build credit but don’t want to risk overspending on a credit card or using a credit card irresponsibly. Credit-builder loans are secured loans, so they often have lower interest rates than credit cards, too. The loan also gives you the advantage of making equal, periodic payments so you aren’t caught off guard when a bill arrives.
You can find a credit-builder loan account through a variety of lenders. For example, online-only lender Self Lender specializes in credit-builder loans, but they’re common products at credit unions as well. Research a variety of options and compare borrower requirements, as they vary from lender to lender.
Pro: No deposit necessary
You won’t have to come up with any money upfront to open this secured line of credit. You will, however, need to make periodic, on-time payments to effectively build your credit history.
Con: No access to the line of credit
You won’t have access to the funds from a credit-builder loan right away. This could become an issue if you suddenly need money. If you want to access the money, you must first finish paying off the loan to the lender.
Some credit-builder loans come with fees, making this a potentially costly option for building credit.
#6: Stay on top of student loan payments
If you have student loans, repaying them will be a crucial part of your credit history. After graduation, you can easily hurt your credit score by missing a student loan payment. Many student loans have a grace period of six months after graduation, meaning you won’t have to make payments during that time. If you’re not paying attention to when that grace period ends, you could easily miss your first payment and hurt your credit score.
A missed payment can cause your credit score to drop significantly and stay on your credit report for years, which can be seriously harmful to someone just starting to build a credit history.
Keep an eye on your email inbox and physical mail for information from your loan servicer (the company to which you make loan payments) regarding your first student loan bill and be sure to make your payment. Continuing to make on-time payments on student loans will help you build a good credit history.
If you can’t afford the student loan payments and have federal loans, you can learn all about how to enroll in an income-driven repayment plan here. Enrolling in an income-driven plan can reduce or eliminate your required student loan payment, making it easier to stay on top of payments and avoid credit damage.
#7: Build credit with a rent payment
If you rent an off-campus apartment, you can build your credit history by simply paying rent on time, if it’s reported to the major credit bureaus. Students should ask their landlord or property manager if their rent payments are reported to Equifax, Experian or TransUnion.
If the rent-taker doesn’t report the payments, you can ask them to sign up for a rent payment service like PayLease or RentTrack that will let you pay rent online and give the landlord the option to report the payments to the bureaus. The rent payment information will be included on a standard credit report and can help students build good credit history without ever opening a line of credit.
Pro: Build credit with money already intended to spend
You’re already spending money paying rent each month, so why not make that payment serve both your housing and credit-building needs?
Con: Some landlords may not agree to report payments
Many landlords check credit scores when a tenant applies, but not many report regular, on-time payments to the big three credit bureaus. Getting your landlord to switch to (and pay for) a payment service they aren’t familiar with might be a long shot, but it’s worth asking.
Con: Not all credit scores factor in rent payments
This isn’t a sure-fire way to build credit, as not all credit scoring models include rent-payment history. The same goes for utility payments: They could help you build credit, but they may not. If you’re looking for a certain way to work on your credit, the other strategies in this article make more sense.
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