Why You Should Start Building Credit in College

Many college students have never heard of a credit score or have no idea what it means. However, your credit score can be just as important as a GPA when graduate and begin your adult life.

credit management in college

What is a Credit Score and Why Does it Matter?

Simply put, a credit score, often referred to as FICO Score, is a three-digit number that depicts a person’s creditworthiness. The higher your credit score the more financially trustworthy a person is considered to be by lenders. Your credit score will range from 300 to 850, with 850 being the highest score you can achieve.

There are three major credit bureaus, Experian, TransUnion & Equifax , which generate a credit score for each person with a Social Security number using a combination of factors from a person’s credit history.

FICO Credit Score Breakdown

  • Payment History – All the payments you have made on credit that you have owed.
  • Amount Owned – The amount of money you have owned at one time.
  • Length of Credit History – The amount of time you have been actively using credit.
  • Credit Mix – The different kinds of credit you have like installment credit (car loans or mortgage loans) and revolving credit (credit cards).
  • New Credit – The amount of credit you have recently opened and shows if a person opens multiple new accounts at the same time.

Your payment history makes up over a third of your credit score that that is why it’s important to begin building your credit score as soon as possible. It usually takes about six months of on-time payment history to provide credit bureaus enough data to generate a score.

You’ll Need a Good Credit Score for Almost Everything

Borrowing against a line of credit has become a rite of passage, and yet another marker of the transition from adolescence into adulthood. As soon as you graduate and start your adult life you will need a credit score to do just about anything.

  • Obtain a Home Morgage
  • Lease or Finance a Car
  • Lease an Apartment
  • Eligibility for Bank Loans
  • Qualify for Employment

Your credit score can also determine if a deposit is necessary and the amount that is necessary to obtain a cell phone, cable service or utility. Lenders will often review a borrower’s credit score when deciding to adjust a borrower’s interest rate or credit limit on a credit card. The better your credit score is the smaller your deposit will be and the lower your interest rate will be.

Some Jobs Will Require a Good Credit Score

You credit score can help you qualify for employment as many employers may require applicants to submit to credit checks. While not all employers require this credit check and will usually understand that a recent graduate is unlikely to have started building credit, it can’t hurt you to have a good credit score when applying for jobs.

Additionally, if your job requires you to travel, you will need a good credit history to qualify for a corporate credit which you can use to rent a car, purchase airline tickets, pay hotel bills and buy dinner for clients. Even though you are reimbursed for these charges, most company cards are personal accounts.

It’s Better to Start During College Rather Than After

While you can establish credit after graduating from college, it becomes more difficult. As a truly independent adult, lenders rely on your credit history to make decisions regarding your application. Without an established credit history, it becomes more difficult to qualify for credit cards or other types of loans. Most credit card companies only open accounts if the applicant’s credit history meets their risk requirements. If you don’t have a credit history, you don’t get any offers.

However, college students are a rare exception. Credit card companies want to give you a card. College students are prime customers because they are likely to be financially successful and have proven to be loyal customers over long periods of time. So many students receive a variety of offers.

Applying, for a basic credit card and using it to make purchases for things like food, clothes and textbooks is a very easy way to start building a payment history. If you apply for a card your freshman year of college, you will have over 40 months worth of credit history. If you always pay off your credit card at the end of each month, you will have built yourself a very nice credit score.

A Word of Caution

While credit cards are a great way to start building your credit score, they can also have many negative consequences. Opening too many credit cards at once, not paying your credit card bill in full, and maxing out your cards can adversely affect your credit score.

For this reason, it is particularly important for college students who are at the start of the credit-building process to take precautions to protect their credit scores and use their lines of credit responsibly in order to procure all the benefits and privileges good credit provides.

While you are likely to receive multiple offers for credit card companies, that doesn’t mean you should complete every credit card application you receive. Be selective and only apply for accounts that offer incentives that will benefit you. Look for things like low or no annual fees, cash back, or airline miles you can use to travel home between semesters.