Starting college this fall? In addition to a degree, there’s something else you can earn that will help your future just as much – good credit.
“Landlords will pull your credit. Maybe you’re looking to buy a car when you get out of college, and you want to get the best interest rate. And now even some jobs will pull your credit report,” says Becky Barry, program manager of the University of Arizona’s Take Charge Cats, an educational organization that partners with campus groups and local schools to teach young people about personal finance.
While it may not be as hard as acing your classes, cultivating good credit does take time and effort. In addition to making good financial choices, you’ll need to regularly monitor for identity theft attacks.
Keep these five things in mind over the next four years, though, and you’ll have no problems building good credit – and protecting it.
1. Start early … make that now
As you’ll learn in college, an early start is more effective than procrastination and cramming. The same goes for credit.
“The earlier you start, the better, because one of the factors in your credit score is length of credit history,” Barry says.
Credit-scoring models (including the FICO score) factor in the age of your oldest account and the average age of all your accounts. Those with a long history of managing accounts responsibly look better to lenders and are therefore rewarded by credit-scoring algorithms. If you start building your credit history at 18, versus after graduation, you’ve got four extra years on your side.
2. Consider student-friendly card options
Getting a credit card can be an efficient way to build credit. Consider cards designed specifically for students; they tend to be more forgiving of short credit histories, and some even have rewards.
However, if you’re under 21, getting a card in your own name can be trickier than it was in the past, thanks to the CARD Act of 2009:
Translation: If you’re under 21 and want a credit card in your name, you need to either:
- Get co-signer who’s over 21, OR
- Prove in your application that you have the means to repay your balances yourself. “If you show sufficient income, you can get approved, and it will also be the basis for how much you’ll be approved for, as well as the interest rate,” Barry says.
The CARD Act is vague on what constitutes an “independent means of repaying,” and it’s ultimately up to the bank to decide if your source of income is sufficient. On the application, you should disclose any money you have coming in via scholarships or jobs, even low-wage part-time jobs, Barry says.
“You just have to show that you can pay the minimum balance,” says Barry. “If your income is small, you may be approved for a credit limit of just a few hundred dollars, but over time, you can increase that limit.”
Whether student loans count as income is a slippery issue. A year into the CARD Act, a survey from the University of Houston Law Center found that 29 percent of college student participants said they’d been approved for a card based on “income” from student loans. These days, no issuers specifically exclude student loans in their student card applications, but you won’t see them mentioned as an acceptable source of income either. Discover’s student card application, for example, lists everything but student loans:
No independent income? Consider becoming an authorized user on a parent’s card. This lets you hitch a ride on an already-established card and have its (hopefully good) history show up on your credit report. Or, you might ask a parent to co-sign a card for you.
3. Watch your credit report
Before leaving home, pull your credit reports at AnnualCreditReport.com. You have three – one each from Experian, Equifax and TransUnion.
If you don’t have any loans or cards in your name yet (or you’re not an authorized user on someone else’s card), the credit bureaus shouldn’t have reports on file for you.
Still, there’s a chance identity thieves have opened accounts in your name. In fact, your age could make you a target, says Becky Frost, senior manager of consumer education for Experian’s ProtectMyID. Because young people haven’t had much time to rack up negative information on their reports, their nice, clean credit becomes a vehicle for any identity thief who wants to get approved for cards.
“By college, young people have usually taken out a student loan or they might have some established credit, but it isn’t a very long history,” Frost says. “There’s less likely to be negative items on their credit reports, so that makes them very valuable to an identity thief.”
Once you’re at school, don’t let up. You can check each of your reports for free once a year at AnnualCreditReport.com. In addition to alerting you to fraud, it’s a good habit to get into, Frost says.
“Students have busy lives,” Frost says. “This doesn’t have to be something that takes up a lot of time. It’s meant to be something that helps them better manage their finances and make sure that no one is using their identity.”
4. Keep personal information locked down
Building good credit and protecting your identity go hand in hand. If thieves get your personal information, they can open accounts and run up bills in your name, leaving your once pristine credit a mess.
Protecting your identity when sharing living space can be tough. In addition to text books and coffee cups, sensitive paperwork (like student loan documents and bank statements) can start to pile up in your dorm room or apartment. Perhaps you occasionally leave your wallet or phone on your desk to hang out with friends down the hall.
Plus, as Frost warns, identity thieves aren’t always shady strangers. An identity thief “could be a fellow college student trying to make ends meet,” Frost says, or someone claiming to be a maintenance person.
“While it’s great that college is very open and tends to be a trusting environment, you want to put safety before blind trust,” she says.
Frost recommends that students do the following:
- Get a shredder. Shred all documents containing sensitive information, like account numbers.
- Have a discussion with roommates about security. “It doesn’t have to be very formal, but spend maybe 10 minutes with them talking about best practices,” Frost says. For example, you might agree that the last person out locks the door, even if they’re just heading down the hall.
- Log out of online (or mobile) banking the second you finish. Don’t leave your bank or credit card account open on your laptop, smartphone or tablet.
- Guard your Social Security number. Whether you’re filling out forms at the student health center or signing up for a bank account on campus during orientation, think twice before jotting down your Social Security number on a piece of paper.
“Thanks to smartphones with cameras, someone could snap a picture and have all your information,” Frost says.
In these situations, ask if you can use a different identifier. If that’s not possible, ask how your paperwork will be stored and secured.
“If they don’t know how they secure documents, you may think twice about leaving them with that paper,” Frost says.
5. Use your cards wisely
Identity theft aside, you probably pose the biggest risk to your credit. Late payments, defaults and maxed out cards are all risks of having a credit card.
So don’t buy anything you can’t pay off completely within a month or two, Barry says – and take care of vital bills before charging anything fun.
“You still have to have a budget and stick to it,” Barry says. “There’s rent, your cellphone bill, groceries and tuition. All those things need to be lined up before a fun trip somewhere.”
If there’s a big purchase you absolutely must have, Barry recommends saving up for it. Once the money’s in the bank, put the purchase on the card for the rewards (or credit building) and pay the balance on time and in full, despite the temptingly small “minimum payment” amount.
“The minimum payment is really a guideline,” Barry says. “That’s what you have to pay. But always pay more if you can, and paying in full is always best.”
Another thing to watch out for: Now that you’re doing your own shopping, expect cashiers to pitch you their store’s credit card – and tempt you with a discount on that day’s purchase.
“Every single retailer you go to wants you to save an extra 10 percent by opening that credit card,” Barry says. “Unfortunately, those are the cards that get forgotten. … You forget to send in a check or pay it online. So that blouse that was $40 is all of a sudden now $80.”
Because of the risks, many young people Barry educates are under the impression that credit cards go hand in hand with financial woe, she says. But it doesn’t have to be that way.
“Credit isn’t a bad thing,” Barry says. “Debt is a bad thing.”