Taking the steps that are necessary to get a good credit score is usually low down on the priority list for a college student. You would probably be living away from home for the first time and would have a host of other issues to take care of.
But there are several reasons why you should devote a little effort to start building your credit score as early as possible. When FICO calculates your score, it will give a weight of 15% to the length of your credit history. So it helps to start working on your credit as soon as you can.
Here is what you should do to get a head start.
1. Get a credit card
Remember that the idea is not to use it when you run short of money. Instead, you should make a habit of paying by credit card for the purchases that you would normally make using cash. You could use it for shopping for groceries or for paying off utility bills.
Pay the entire outstanding immediately on receiving your credit card statement. This will create a record of prompt payments and regular utilization.
Do not delay your credit card payments. This is the worst thing that you can do as far as your credit score is concerned. A FICO score is based on payment history to the extent of 35%. This means that it is practically impossible to maintain a high score if you don’t pay your outstanding amounts in time.
Another useful point to keep in mind is that you should get a credit card with a low limit and never exceed a 70% utilization ratio. If you max out your card it will reflect poorly in your records.
Additionally, if you have a high limit, you may find it difficult to pay the entire amount when you get your statement, forcing you to carry an outstanding balance. This will result in interest being charged till you clear all your dues.
Keep in mind that the rate of interest for a credit card outstanding balance is usually very high. Expect to pay up to 12% per year or even more.
2. What if you are not eligible for a credit card?
The credit CARD Act, also known as the Credit Cardholders Bill of Rights, prevents credit card companies from issuing a card under certain circumstances. For example, you need to be over 21 years old. The issuer may also ask to see proof of income.
If you can’t get a credit card easily, you could consider opting for a secured credit card. This is a credit card that is linked to your bank account and its limit is restricted to the balance of cash that you hold. Effectively, it is like a debit card, but the card issuer reports your payments to the credit bureaus, helping you build a credit history.
Another option is to be added as an authorized user onto someone else’s credit card. If you get this facility on, say, your parents’ card, it is necessary to become a fully authorized user. The card issuer may simply issue a card in your name but tie the account to a single owner.
If the card is correctly issued in your name, any utilization followed by prompt payment will help to enhance your credit score.
3. Keep a close watch on your credit report
You are entitled to verify your credit report from Equifax, Experian, and TransUnion once every year. Use this facility wisely and if you see any activity in your account that is not related to you, it is essential to report it at once.
Checking your credit report on a regular basis will also help you spot if your identity has been stolen and your personal data is being used in a fraudulent manner.
There are several precautions you can take to prevent your identity from being hijacked. Never respond to requests for personal information regarding your name, birthdate, social security number, bank account details or credit card number unless you are very sure that the person who is asking for them is genuine.
If you don’t get your credit card statement in time, check with the card issuer. Your account may have been hacked.
4. Other credit card related precautions
Using a credit card sensibly, paying off the entire balance before the due date, and restricting usage to less than 70% of the limit will help you build your credit score.
But some of the actions you take can serve to damage your score. You should avoid applying for multiple cards at the same time. This will result in a spike in your new credit, a factor that plays a part in calculating your FICO score.
The length of your credit history is important in arriving at your score. If you cancel an older credit card, the length of credit in your records will automatically be reduced. It is better to keep your oldest card active.
Another potentially damaging action is to co-sign for a friend’s credit card. If the person you have co-signed for delays payments, it will affect you adversely.
5. Don’t fall behind on your payments
If you are staying off-campus, you would need to pay your landlord a monthly rental. You would also receive monthly bills for your mobile phone usage, electricity, and cable. It is easy to forget to pay these. If you are late by several months, the bills may get sent to a collection agency and this could have a negative effect on your score.
When you move, it is important to inform all the companies that send you monthly bills about your new address. Leave a forwarding address with your old landlord. You don’t want to be in a situation where you miss making a payment for several months and are then confronted with a massive bill that includes late penalty charges and interest.
6. Credit inquiries from lenders
When you are planning to take a loan, you may put up an application to several lenders. You would need to authorize them to verify your credit score and also obtain a copy of your credit report.
In the normal course, if lenders access your credit report, it should not affect your score. But if you apply for new loans repeatedly over a period of several months, the large number of inquiries to your account would affect your score adversely to some extent.
FICO scores are designed to take “rate shopping” into account. This means that you may apply to several lenders at the same time and the resultant multiple inquiries on your account will not have any impact on your score.
7. Errors on your credit report
It is quite possible for somebody else’s data to appear on your credit report. This could happen for several reasons.
The records of a person who has a name similar to yours may get mixed up in your report. An error in entering the Social Security number may also lead to an incorrect entry.
Another common problem is that a payment made by you for your credit card outstanding amount may inadvertently get credited into another person’s account.
It is critical to report an inaccuracy in your credit report the moment that you spot it. Furnish complete details to the lender and to the credit bureau so that the mistake can be corrected. You would need to closely monitor the progress to rectify the error. Don’t just write to them and forget about it.
8. After graduating, pay off your credit card debt as soon as you can
While it is advisable to avoid carrying any outstanding on your credit card from month to month, the fact is that many new graduates leave college with substantial debt on their cards.
If you fall into this category, take immediate steps to liquidate your debt. By doing this, you will reduce your interest burden and, over a period of time, have a healthier credit score.
9. Student loans
Defaulting on your student loan can play havoc with your credit score. Try and ensure that all payments are made promptly on or before due dates. If for any reason, you miss a payment by a few days, you needn’t worry too much. A delinquency on a Federal student loan is not reported to the credit bureaus until it has been outstanding for a period of 90 days or more.
If you have a problem meeting your student loan commitments, it is best to contact your lender and try and renegotiate the terms. Get in touch with the lender as soon as possible.
After 270 days, your “delinquent” federal student loan account will move into “default” category. Not only will this impact your credit score, it will also make your loan ineligible for deferment, forbearance, or other repayment programs.
Discuss the situation about your federal student loan with your lender and see if you meet the criteria for deferment or forbearance. It may also be useful to sign up for student loan counseling.
10. Maintaining a high credit score can save you thousands of dollars
Your FICO score can range from 300 to 850. A score of 720 or more is what you should aim for while one below 650 is considered poor.
Your score will influence the rate of interest that you have to pay on your auto loan and your mortgage when you decide to buy a house. In fact, when you rent a house, it is likely that your future landlord would like to see your credit score so that he can judge whether you will pay your rent on time.
Don’t underestimate the utility of a high FICO score. In addition to a lower rate of interest, your loans will be processed faster and the likelihood of an approval will increase.
The advantages of having a high FICO score are many and the best way to work towards a score in the 720+ range is to start building your credit history as early as possible.