As a student, living away from home and being responsible for your own finances for the first time can be hard to manage. Chances are, you have rent and tuition to pay, and you may have taken out a government or private loan to help with the expenses. The money you have been loaned for this, along with other purposes, is called “credit”.
In this article, we’re going to introduce you to seven ways of building credit that can help you stay out of debt during your time at university, and even afterwards.
How to build credit in seven steps
1. Learn the basics
The first thing to do when you’re looking to start building credit is to familiarize yourself with the terminology. It’s important that you understand what you’re signing up for, and what your obligations are before taking out a loan or opening a credit card account for the first time.
Here are the most important words and phrases for you to get to know:
- Credit: Money you have borrowed from a financial institution, e.g., a loan from your bank, or purchases made on a credit card.
- Creditor: The organization you’re borrowing the money from. Usually, a bank, retailer or credit card company.
- Credit report: A report that contains information about your borrowing behavior, e.g., what credit accounts you have, your payment history, etc.
- Credit score: This is a score of your behavior as a borrower.
Your credit score is determined by a number of factors, including payment history, credit utilization, and length of credit history. This is one of the reasons it’s a good idea to start building good credit early on, as it could have a positive effect on your credit score in the future.
2. Become an authorized user on your parents’ credit card
If your parents have a credit card and they pay it off in full every month, this is an easy and low-risk way to start building credit of your own. As an authorized user of the account, you don’t even need to use the card. Just having your name on there will help boost your credit utilization and payment history, both of which have a positive impact on your credit score.
3. Sign up for a credit card of your own
Once you understand what credit is, how it works, and what your responsibilities are as a borrower, you’re ready to start building credit with a credit card of your own. As a first-time borrower, you may want to consider getting a secured credit card. These cards work in the same as standard credit cards, but in order to be approved for one you have to pay a deposit, which is usually the same amount as the credit limit on the card.
Secured credit cards usually come with a low credit limit, and you can’t borrow more than the amount you put down as a deposit. This makes it safer for you to build credit using a credit card without the risk of running up a large bill and falling into debt – something which can negatively affect your credit score and make it harder for you to get loan requests approved in the future.
4. Make payments on time
The best way to build credit is to pay your bills on time and in full at the end of every month. If you get into the habit of doing this from when you get your first secured credit card, it will help you maintain good credit throughout your life.
With a credit card, it can be very easy to forget you’re spending money when you pay for something in a shop or online. Create a livable budget and stay within your means so you don’t get hit with a large bill at the end of the month.
When it comes to setting your budget, remember to factor in all your necessary payments, not just your credit card bill. Your payment history can be affected by forfeiture on any of your bills, including rent, utilities, your phone contract, and doctor’s fees. Even though they don’t all rely on credit, many companies can report late or missed payments on your credit history.
To build a good credit score, it’s important that you pay all your bills on time. If you are worried you are not going to be able to make a repayment, you must contact your creditor as soon as possible to see if you can defer repayments or work out a new repayment plan.
5. Find out how student loans can help build your credit score
If you’ve taken out a student loan to help pay for your tuition, you already have credit history. You can improve your credit score by keeping up to date with your loan status and paying on time. Not all countries in the EU offer government grants to students, so you may have taken out a private loan. If this is the case, and you are struggling to make your payments on time, you have two options:
- Deferring payment. If you need to defer your payment, approach your creditor to ask for a period of suspension. Just make sure you check your credit report to ensure it has not been recorded as a late payment if you pay within the newly agreed terms.
- Refinancing your student loan. You may be able to refinance your loan to get a lower interest rate. If you cannot demonstrate a long credit history, your creditor may not approve this unless you have a cosigner. If you do refinance your student loan by adding a cosigner, it’s even more important that you make repayments on time, as late payments will negatively affect not only your credit score, but theirs as well.
6. Upgrade to a traditional credit card
After 6-12 months of making timely repayments on your secured credit card, you should be able to upgrade to a traditional credit card and keep on building your credit. Take care, however, as traditional credit cards typically have higher credit limits. It would be unwise to get into debt by spending more than you can afford to pay back. As such, continue to follow the steps for responsible credit usage you’ve set yourself, including budgeting and paying your bills on time.
This is the best practice for maintaining a good credit score throughout your life.
