Credit History 101 for College Students
Starting a college education is one of the most trying and exciting times for a young adult. The decisions that you or your college student makes now will have a profound life long effect. Credit scores affect the ability to get a mortgage or small business loan.
Aside from taking classes, gaining new experiences, and getting ready for a career, one part of a college education is gaining responsibility that comes with earning a credit score. A credit card is not a toy, or an all-exclusive pass to buy unlimited beer and nachos. It is a tool that must be used properly to build one's credit history.
Considerations Before Applying for a Credit Card
First, it is important to understand the nature of a credit card. Many people think that a credit card is basically a free warrant spend money, like an I.O.U. but this is simply just not the case. A credit card is an open credit line that charges interest, with the key word being interest. That being said, credit cards charge among the highest interest rates among any available loans.
And that is essentially what a credit card is; a loan. You or your grad needs to understand that if a person does not pay off his or her balance at the end of each month, her or she will be charged accordingly. That money is essentially wasted on interest.
Getting approved for credit is much more difficult that it has been in the past. Many lenders and credit agencies have cracked down since the housing bubble. Here are some tips on how your college student can build up his or her credit score.
Take it one step at a time- It is important to start off with just one credit card. Since that's all a person with no credit can probably get approved for, it should not be too hard to keep track of transactions. The more credit a person has the more care needs to be taken. Also, when a person applies for a credit card, a lender performs a "hard" credit inquiry. These go on a personal credit score, and too many credit card applications will lower a credit score significantly.
You will need a co-signer- A grad will need to have a person with a good credit history co-sign for a credit card. This means that this person is willing to incur any debt in the event the credit card account goes in to collections. It should be clear that if you or your grad defaults on a credit card, the co-signer's credit will be damaged as well as the cardholder.
You will need to build up accounts- You or your grad will want to start with one credit card account, but eventually you will need to have three lines of credit in order to receive a credit score. Student loans do count as a loan account, so you may already have multiple accounts showing up on your credit score.
Also, a good rule to remember is to never use more than 30% of your total credit . This makes it look like you may be having trouble making payments and makes you a higher risk.
Spice it up- Since you will work toward having multiple accounts, it is a good idea to diversify your account types. A mixture of personal loans, mortgages, credit cards and personals loans will boost your credit score in the long term.
Make payments on time- This is the single most important aspect of owning a credit card. Making on time payments to a credit card will build up a credit score, while transversely, a missed payment will lower a credit score greatly.
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