Credit cards are scary, I’m going to be honest. When I was younger and began working odd jobs, my parents opened up a debit card for me to start saving money. A debit card soon turned into a credit card during my senior year of high school. I know what you might be thinking, a high schooler with a credit card? Probably not the best idea. However, I grew up in a middle-class family who had, like most families, both good and bad financial months. It was instilled in me at a young age that working hard for my money is a given and if I spend that money- I’m the one who has to make it back.
During this time, I knew I had this card, but never really understood what it truly meant. I knew it was basically like a loan from the bank and that I had to pay it back in a timely manner, but I didn’t really know what happened if I didn’t pay it back on time, if I went over the limit, or even how they determined my limit. What even is a credit score and how do I get one? I didn’t ask questions and the bank didn’t really care to educate unless I specifically asked. They willingly handed an 18-year-old a credit card and, from what I recall, told me to “have fun”. And, it was fun! That all came to an end, however, when I finally took matters into my own hands and started to look into my credit score and what this all meant.
Today, I will be giving you tips on how to build your own credit, as well as helping you understand what it actually means!
WHAT IS CREDIT?
This is the act of borrowing money from the bank that you have to pay back later.
WHAT IS A CREDIT SCORE?
These scores are 3-digit numbers that rate your trustworthiness as a borrower. The higher the number, the more likely lenders are to trust you to borrow money from them. This also affects how much money lenders are willing to give you (your limit).
Credit scores range from 300-850.
Think of it kind of like grades in school. If you’re bad with money, you’ll have a low score (i.e – low grade), if you’re good with money, you’ll have a high score (i.e – high grade). The goal is to keep our scores above 700!
WHAT AFFECTS YOUR CREDIT SCORE?
Something I’ve noticed is that our scores typically are stable as long as you don’t do any drastic changes. If you completely miss a payment, your score may drop, if you open up a new card or take out a new loan, your score may also go down a few points. Things like, how much money you owe (amount of debt), if you make payments on time, and the types of debt you have also affect your score.
WAYS TO BUILD CREDIT WHILE IN COLLEGE
BECOME AN AUTHORIZED USER ON YOUR PARENT’S ACCOUNT
Before actually getting your own card, you can start building credit by becoming an authorized user on your parent’s account.
This does not mean you get to use their credit card (unless you both agree to it), but your name will be put on their account and their bank report will be added to your name. If your parents have good scores and they pay their bills monthly and on time, then both yours and their credit scores will continue to grow. It’s termed “piggybacking”. Your credit score will get a boost with fewer risks associated with having your own credit card, since the primary account holder (your parents) will be able to monitor spending.
Get a College Card
College cards are great for young adults looking to build credit. These cards are designed to help college students with no credit history to build that credit. Student loans can do a number on one’s credit history, so by having a college card and being responsible with it, your score can increase!
I started out with a cash-back college card (shout out to WellsFargo for trusting 18-year-old me!), which gave me a small limit that was enough for certain items like paying for gas, monthly bills such as phone bills or car payments, and textbooks. By using them on monthly payments, this helps the borrower because they’ll have time to re-pay before the next payment. To keep your score high, paying in full each month is the best way to go.
PAY ALL BILLS ON TIME
To add to the title – Pay all bills on time, preferably in full!
This one is really important. Let’s say you spent $200 this month on your card and your next payment is May 15th. Your bank will give you the option of paying the minimum amount if you don’t have enough money to pay in full. Although this option is tempting, paying the amount in full will help in your goal to build financial credit. Even if this means asking your parents for help paying it off this month.
DO NOT APPLY FOR SEVERAL CREDIT CARDS AT ONE TIME
By signing up for several, you’re asking multiple banks to loan you money. This can actually hurt you in the long run if it’s your first time dealing with financial credit since, 1) having the options of borrowing a large sum of money from multiple cards can be tempting, and 2) banks can see that you’ve applied for multiple cards, which will affect your credit limit each time.
Applying for a credit card actually does affect your score by a good amount of points. If you have built up strong credit over several years, it will hurt you less, but if you have barely established credit and apply for multiple cards, it can lower your score significantly.
Student loans are also borrowed money, except in a much larger and scarier amount. Although it’s a lot more money, it’s still borrowed money, which is what credit is. If not paid on time, it will affect your score significantly.
What are ways you find are helpful to help build credit? Do you have a favorite bank? Comment below!