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If you’re a student or young adult, you’re most likely learning how to manage your money for the first time. Newfound financial experiences can be liberating.
If you want to buy something, you can make purchases with your first credit card. You can also pay for expenses without having to turn to a friend or a family member. Knowing how to build good credit and how credit cards work while balancing your independence will ensure stability in your financial future.
Building credit early helps with future loans, rentals and job opportunities.
Start with a secured credit card or become an authorized user to build credit.
Avoid late payments, minimum payments and maxing out your card to maintain good credit.
Apply for a credit card by submitting ID, proof of income and reviewing your credit report for any errors.
If you don’t qualify, consider debit cards, digital wallets or Experian Boost to build credit.
Good credit score can help you access various financial products and services that can make it easier to own a home, buy a car or even get a job. Learning how to build credit is a lifelong skill that can ultimately help secure your financial future.
Credit literacy, or the ability to understand credit, is key to navigating the world of credit cards. Familiarizing yourself with these terms can help you become more credit literate.
Having a good credit score is an important way to build good credit. A credit score is a number that determines whether a person can obtain a credit card. A score within the range of 300-670 is on the lower end of the range and suggests you have bad credit. A credit score ranging from 670-850 implies you have good credit and are more likely to pay off future debts. Even if you have a low score, you still have opportunities to improve or raise your credit score.
A credit report is a statement that gives you information about your credit history and current credit situation. Credit card companies use the report to determine if you are eligible to receive additional credit. You can obtain a free credit report every year.
With more people using cashless forms of payment like credit cards, it’s important to learn about how to keep track of your finances and implement good spending practices.
Whether you’re a new college student or a young adult on your own, making good financial decisions can ensure stability. Here are two ways you can build credit.
You can start by building your credit with a secured credit card. A secured credit card is a card funded with money you have already deposited to pay off the card’s balance. For instance, if you deposit $300 on the credit account, your card limit will be $300.
Here are the steps involved with getting a secured credit card.
Apply for a secured card on the website of any credit card company.
Once you’re approved, the company will tell you how much you have to deposit to the card account.
Your card may arrive within a few weeks. Then you can activate it and begin using it.
If you stay within the predetermined amount, you will be able to use the card to build credit.
Another option is to become an authorized user. An authorized user is an individual besides an account holder who has legal permission to use a credit card. The user is not always responsible for paying off account balances and may have limited management control.
Getting your first credit card is exciting, but there are risks. If you’re not cautious about your credit card use, you run the risk of having a bad credit score. Below are some of the pitfalls to avoid.
Making too many charges on your credit card can lead to credit card debt, but there are ways to help you be debt-free. If you reach or exceed your credit card limit at the end of the month, it may be unlikely a credit card company will extend credit to you in the future. If you miss a payment or only make the minimum required payment, you also run the risk of having bad credit. A credit card balance can spiral out of control if not properly managed, leading creditors to close your card or charge you higher interest rates.
While building credit is important, many young people make careless errors with their credit cards. Here are some of the most common mistakes made when using credit cards for the first time.
Students often make late payments because they’re not paying attention to the credit card payment date. But paying cards late hurts you in the long run because of extra fees. Even if you’re making a small payment, make sure you pay your credit card bill on time. If you can, pay off the entire balance every month.
While paying the minimum balance can save you money in the short term, it can end up costing you dearly. Just like with late payments, paying the minimum balance means that you’ll ultimately fork over additional money in fees and interest.
Reaching your credit card limit can hurt your finances and credit score. Make sure that you keep track of your spending. If you have maxed out your card because of an emergency, you may be eligible for a hardship repayment program.
While having one card can help build credit, having too many cards can be harmful. If you are managing more than three credit cards, it can be harder to keep track of your expenses. Focus on having one or two, and pay off those balances every month.
Credit cards can parlay into future financial success. Many employers and landlords take credit scores as an indication of financial responsibility, so having good credit can make it easier to land a job or rent an apartment. If you have good credit, you may also qualify for lower interest rates on car loans and private student loans.
According to Dan Schuessler, co-founder of MoneyGeek and CardFit, students can start to earn travel rewards to offset future travel expenses. "As a student, you can start building travel rewards by using a credit card that offers points or miles on everyday purchases like groceries or textbooks. For example, with the American Express Gold Card, students can earn 4x miles on all grocery and restaurant spending. They can redeem these rewards for flights home during school breaks or fund hotel stays during vacations by transferring points to credit card partners. By using your card responsibly, paying off balances each month, and taking advantage of sign-up bonuses, you can accumulate points that make travel more affordable, allowing you to take a vacation with friends or go home for the summer."
There are many options for students who want to apply for a credit card, but you will need to fulfill some basic requirements to be eligible. Best practices include completing an application, submitting documentation and checking your credit report.
Pay attention to fees, interest rates and other charges when looking for the right card. Whether you’re visiting a credit company’s website or your local bank, you must submit an application to be approved for a credit card. The credit card application process can take less than 10 minutes and will usually involve sharing basic information. Once you click submit, creditors will examine your debt-to-income ratio, which is how much money you earn relative to your debt. You should have a decision within 30 seconds of applying.
Some documentation is needed to apply for a credit card tailored to students. You will need to submit a form of ID that shows you’re at least 18 years old and enrolled in college. Often, you must also show your social security number to prove you’re a U.S. citizen or a permanent resident, in addition to providing proof of income. A part-time job can qualify as proof of income, but if you don’t have any income, you can add an employed co-signer to your credit card application.
Applicants should always check whether they have credit previously established in their name. Even if you haven’t had a credit card, you may find that you are the victim of identity theft. You should also make sure there are no errors in your credit history, which can happen if you have a common name. A credit freeze can prevent additional errors or fraud.
Showing an established credit history can be difficult if you’ve never had a credit card. If you are studying on a visa or don’t have documented status in the U.S., you may also need to provide additional paperwork.
Some issuers only offer credit cards to U.S. citizens or permanent residents, but you don't need to be a U.S. citizen to qualify for a credit card. Be prepared to verify your identity with some form of official documentation. If you are in the U.S. on a student visa, you may be eligible to qualify for a student credit card with a copy of your passport, student visa, immigration forms and an eligible U.S. bank account.
With full-time course loads, most college students have limited time to make money. Student credit cards are specifically designed to give those with a low income a good chance at being approved. Some issuers also have set agreements with institutes of higher education which enable enrolled students to obtain a credit card, so it’s worthwhile to ask your school for guidance.
Digital wallet payments and debit cards can help you bypass credit cards altogether. If you don’t qualify for a credit card, there are also steps you can take to build your credit to apply for another card in the future.
It’s likely you already pay for streaming services such as Netflix, Hulu or HBO, or use Verizon to make calls. Experian Boost is a feature offered by credit reporting company Experian which can help you get credit for monthly bills by making qualifying bill payments part of your credit file.
The more easily you can show you are serious about paying bills, the more likely you’ll have a higher credit score — and creditors will issue you a credit card. You can raise your score if you are a dependable tenant. Companies such as RentTrack and PayYourRent can issue reports to credit bureaus upon request, or you can ask your landlord to report rental payments directly.
A variety of resources can help students learn about building credit. The following sites are a good place to start:
About Ella Vincent
Ella Vincent has been a financial writer for three years. She attended the University of Illinois at Chicago, where she studied both journalism and finance. Ella has written for the finance site, Motley Fool where she offered stock analysis to investors. She also covered the US stock market for IG Group, a UK-based stock and foreign currency trading corporation.
She became interested in the stock market ever since she saw financial advisor, Mellody Hobson. In her spare time, Ella likes to attend concerts and watch basketball with family and friends. Follow her @bookgirlchicago.
