Good credit can open up financial possibilities that are otherwise hard to achieve, so it makes sense to start building good credit as soon as possible. That can be tricky when you’re a student but that doesn’t mean it’s impossible. If graduating with good credit is one of your goals, there are steps you can take to achieve it.
Here are five ways you can begin to build your credit while you’re still in school.
Five Credit-Building Strategies to Try Before You Graduate
You don’t have to wait for your degree before you start building your credit.
1. Make payments on a student loan while you’re in school
Your credit score measures your ability to repay debt. So, if you demonstrate consistent and timely payments, your credit is likely to improve. You can start by making payments on your student loans, if you have them, even before you graduate.
Pros: You’ll not only reduce some of your debt, thereby improving your debt-to-income ratio, but you’ll develop a solid payment history. Some lenders will even reduce your interest rate if you agree to make fixed payments ($25 per loan per month) or interest-only payments during the in-school and grace periods.
Cons: Depending on your financial situation you might not have enough cash for the additional monthly expense of student loan payments while you’re in college.
2. Use your rent payments to build credit
Establishing a payment history is important in building good credit. One bill you probably pay consistently every month is rent. While rent payments typically aren’t reported to credit bureaus, there are several companies that can help you make them count. Businesses like PayLease, Rent Track and Rental Kharma help you add previous and current rent payments to your credit report to build your payment history.
Pros: Start using your bills to your advantage — you’re going to pay rent anyway, so it might as well help you prepare for your future.
Cons: Some of these services cost money or require your landlord to participate. You could find they don’t fit your budget or your landlord isn’t OK with changing over to a new payment system. Also, not every credit bureau will accept your rental history all the time, so don’t count on this method as an absolute even if you do go with it.
3. Get a co-signer to help you qualify for a credit card
Paying off a credit card each month is a great way to build credit, but college students may have trouble qualifying for a credit card.
If you’re under 21 years old, the Credit CARD Act of 2009 prevents you from getting a credit card unless you can demonstrate an independent means for repaying the debt or you have a cosigner who is 21 years old or older.
If you’re in school and not working, it’s unlikely you’ll be able to qualify for a credit card unless you get a cosigner. If you can find someone willing to cosign for your credit card, making small purchases with the card and paying them off every month could be a strategy to start building your credit.
Pros: Having a credit card that you can pay off entirely each month will demonstrate your ability to make timely payments.
Cons: If you miss payments, not only could your credit be in jeopardy but also the credit of your cosigner. It is also easy to get overextended with a credit card, since paying with plastic feels the same whether you spend $5 or $500.
4. Get a secured card
A secured card is a credit card where you deposit your own money as security for your purchases. Your credit limit is equal to the amount of your deposit. A secured card is a good way for someone with no credit or bad credit to build a good credit history. Your monthly activity on the secured card is shared with the credit bureaus, so if you’re making regular payments this could help your credit.
Pros: A secured card works similar to an unsecured credit card to build your credit and doesn’t require a cosigner.
Cons: You’ll have to put a deposit down, which could range up to $300 depending on the card issuer. If you’re tight for money this could be a huge chunk out of your budget.
5. Use a credit-builder loan
With a credit building loan, the money you borrow is held in an account at the financial institution for the length of the loan. You build credit by making consistent, timely payments which are reported to the three credit bureaus. When you’ve repaid the entire loan, the balance of the account is released to you. These loans are usually offered by small financial institutions like a credit union or a local bank, or online through companies like Self Lender.
Pros: On-time payments can greatly impact your credit score, so this strategy could be quite powerful in helping you develop good credit.
Cons: A late payment could hurt your credit score. So, before you go this route, make sure you’ll be able to keep up with the payments regularly until the loan is fully repaid.
Build good credit in college for a bright future
Building your credit while you’re still in college can help you prepare for the realities of life after graduation. You’ll need good credit to secure your own apartment and purchase a vehicle. Some jobs even run a credit check before they’ll employ you. Good credit can help you qualify for loans and get a lower interest rate. Working on your credit now could make these initial steps into life post-college easier.