One of the most exciting parts of leaving home for college is the opportunity to begin establishing your own finances. Responsible use of student credit cards can be an important part of establishing that path.
But how do you use a credit card responsibly? What do you need to know before opening up credit accounts? We’ve got the answers that will set you on the right path to responsible credit use in college and beyond!
In This Article
Student Credit Cards and Building Your Credit File
Let’s cover the basics first. Your credit history is critical to your financial empowerment and laying down a solid foundation is important.
Your credit history is maintained by the three credit bureaus: Experian, Equifax, and TransUnion. Each bureau maintains a file on individuals who engage in reportable financial transactions. This credit report contains each person’s financial history, including:
- Payment history
- Credit accounts (both open and closed)
- Available credit
- Tax liens
Your credit report doesn’t include:
- Employment information
- Bank account balances
It’s important to keep an eye on your credit history, as the bureaus compile this information from what’s reported to them, since errors can happen.
You’re entitled to dispute information that you believe to be inaccurate. The credit bureau will investigate and remove any entry that the creditor can’t prove is valid.
Under federal law, you are entitled to receive a copy of your credit report from each of the three bureaus once every twelve months. Because of the COVID-19 pandemic, you can access free weekly online credit reports. You may do so by visiting annualcreditreport.com.
How to Build a Strong Credit History
Credit invisibility is one of the biggest hurdles for college students when establishing a credit history. An estimated 26 million Americans are credit invisible, and it disproportionately affects young adults, immigrants, undocumented workers, and BIPOC individuals.
If the credit bureaus don’t have any credit history for you, you’re likely considered credit invisible. The good news is there are ways to get credit, especially as a college student.
- Secured credit cards and credit builder cards: Secured cards are a great option for someone looking to obtain their first credit card — if you have the funds. You deposit an amount of money with the lender, and they issue you a credit card with a credit limit not exceeding the deposit. Then you can use that card for everyday purchases and pay it off each month, building a timely payment history.
- Student credit cards: Many lenders offer special credit cards for college students. However, read the terms and conditions carefully so you know what you’re signing up for.
- Become a cosigner/authorized user on a parent or relative’s card: A family member can make you an authorized user on their credit card, which means their use of the credit card account reflects on your own credit history. It is important to make sure the primary account holder is someone who never misses a payment—otherwise, this could negatively impact your credit score.
If you decide to open a credit card account, it’s important to build a strong credit history. Your credit impacts many aspects of your future; credit is instrumental not only for buying homes or cars, but for renting homes, turning on utilities, and sometimes even employment.
Here are some tips to make sure you start your credit history off right:
- Always make payments on time: Your payment history is the biggest influence on your credit score. A flawless streak of on-time payments may boost your credit. Getting a single late payment stays on your credit report for up to seven years.
- Don’t use your whole credit line: The credit score formula calculates your debt burden as the percentage you’re using of your available credit. You should try to use no more than 30% of your credit limit at one time. If you have a credit limit of $1,000, try to maintain a balance of no more than $300.
- Avoid interest by paying off your monthly balance: You can avoid accumulating interest charges if you pay each balance in full when you receive the bill and before the due date.
- Make a budget and stick to it: Establishing a budget helps you control your finances instead of your finances controlling you.
Work on Getting or Improving Your Credit Score
What is a FICOⓇ score? Credit scores, often known as FICO scores, use a proprietary formula to assess how likely a borrower is to repay a loan. FICO scores range between 350-850 with higher scores being better and are based upon five criteria, all in your credit report.
- Payment history: The single most important factor in your credit score is your payment history. Late payments are a significant detriment to your credit score; timely payments help boost it.
- Current debt burden: This includes the number of active credit lines you have, the age of your accounts, and how much of your credit you are using (aka, your credit utilization ratio, or the amount of debt you have versus your combined credit limits).
- Variety of credit used: Banks believe consumers are more creditworthy if they make use of a mix of credit types, such as car loans, mortgages, retail accounts, credit cards, etc.
- Length of credit history: In general, this category takes three things into account – how long your oldest account has been open, the age of your newest account, and their average.
- New credit accounts: Too many new credit accounts in a short period can be an indicator of financial stress, lowering your credit score.
Selecting the Best Card for You
Establishing credit and selecting the best student credit card isn’t a one-size-fits-all solution. You should do your research and make the best decision for your unique set of circumstances.
Once you’ve decided, it’s important to use your card responsibly. Doing so can put you squarely on the path to financial empowerment.