When my husband and I were dating, the topic of merging our finances came up. It was shortly after we graduated college, and I had just moved into an apartment with him and a mutual friend.
I asked what his credit score was, and he gave me a thoughtful look.
“I’m not sure,” he said. “I’ve never looked it up.”
As it turns out, there wasn’t anything to look up. After having his college funded by a generous grant from his late grandfather, he had spent his short adult life paying for everything in cash. He didn’t have a credit card, loan balance or any other discernible line of credit to his name.
It took us over a year to build his credit up to a respectable level, and I can happily report that we now have nearly identical scores. Still, his story remains a cautionary tale for what can happen when you don’t actively cultivate a strong credit history.
Thankfully, my husband’s situation can be easily avoided – even if you haven’t graduated college yet. Here’s how you can start to build your credit as a student.
Five Ways to Build Your Credit
Become an Authorized User
If your parents have credit cards, they can add you as an authorized user. This will allow you to use the card while they remain responsible for the payments.
With this strategy, you essentially “piggyback” off your parents more established credit history. Payments made to the card will be copied onto your credit report, allowing you to build credit without any extra work on your part. This works best with a card that’s been open for several years and is in good standing.
If trust is an issue, your parents don’t actually have to give you a copy of the card or even tell you the card number. An authorized user doesn’t have to make any purchases of their own in order for their credit history to improve.
You’ll need your parent’s permission to become an authorized user, so this is only an option if you’re on good terms. You’ll also want to be confident in your parents financial habits, as late payments will actually have a negative impact on your credit.
Open a Secured Credit Card
If becoming an authorized user isn’t an option, you can open your own card. Usually, the only option for those with limited credit history will be a secured credit card.
A secured card requires a small deposit that acts as collateral, typically between $49 and $200. That deposit then becomes your credit limit, allowing you to make purchases with little risk to yourself or the lender. Because the credit limit is very small, secured cards are only useful for modest purchases.
The percentage of that credit limit you use has a large impact on your credit score. This is also known as credit utilization, and a percentage above 30% will harm your credit score.
For example, a secured credit card with a $100 limit should not exceed a $30 balance. You should also pay off the balance in full on or before the due date.
The best way to maintain an adequate credit utilization is to only use the card for a small, recurring bill like your Netflix or Spotify subscription. Then, set up automatic transfers from your bank account to the secured card so you never miss a payment.
Some secured credit card providers like Capital One and Discover offer a free look at your credit score so you can monitor its progress.
Take Out a Credit Builder Loan
A credit builder loan is a lending product with the sole purpose of improving your credit. Here’s how it works.
First, you apply for a credit builder loan, usually for an amount between $500 and $1,500. You don’t receive the funds immediately like you would with a traditional loan. Instead, you start making small monthly payments, usually over a period between 12 and 24 months. At the end of the term, you receive the amount of the loan, minus some fees. The total fee amount is usually less than $100.
In exchange, the company providing the loan will report your monthly payment activity to all three credit bureaus. Just like with a secured card, your credit score will improve with little risk to yourself or the lender.
A credit builder loan is a great option to build credit as a student because you don’t need to have any credit history to qualify. Applicants just need to be 18, have a Social Security Number, be a US citizen or resident and have a bank account or debit card.
Unlike most other forms of debt a student might try to take on, credit builder loans don’t require a cosigner. If you’re trying to become financially independent from your parents, that’s a strong selling point.
Get Credit for Rent Payments
If you don’t want to take out a credit builder loan or open a secured credit card, there’s another way to build credit as a student. Your monthly rent payment can actually be added to your credit report.
However, this option requires signing up for and paying a third-party service to verify your rent payments and report them to the three credit bureaus.
Services like Rental Kharma have a one-time activation fee, while others like RentTrack charge an ongoing $9.95 monthly fee. Some require your landlord to register in their system -bad news if the two of you are on shaky terms.
Pay Bills on Time
Paying utility bills on time won’t improve your credit, but paying them late will have the opposite effect. Those late payments may go to collections, which will show up on your credit report and damage it. This also applies to cell phone bills and even library fines.
You can pay your bills manually and set up reminders in your phone or Google Calendar. Many providers also have their own bill reminder system via text or email.
Most companies let you sign up for automatic payments, meaning the bill will be debited from your bank account automatically. This is the easiest option, but you should still double-check every month to make sure the payment has gone through.
Verify that you have enough in your bank account when the money is being withdrawn or you’ll overdraft the account. This will result in the payment being returned, ultimately resulting in another fee.
Do you have tips to build your credit as a student? Share them with us in the comments!