The new school year is in full swing and if you’re a university or college student, then you’ve probably already settled comfortably into your new routine and dorm room. As you buy books, begin assignments and make new friends, the last thing you’re likely thinking about is your credit.
But even at this stage of life, it’s critical that you start planning for your future. That means making smart credit decisions now that will pay off later in life, saving you up to tens of thousands of dollars. Adopting solid habits while you’re a student can lead to lower interest rates when borrowing money for large purchases such as car loans or mortgages. You might even be able to refinance your student loans after you graduate and pay a much lower interest rate.
So, what can you do now to build your credit? Here are seven strategies that you should consider:
1. Become an authorized user
One of the biggest factors that influences your credit score is the length of credit history associated with your file. This can be a challenge if you’ve never had a credit card before. If a parent has good credit, ask them if they would be willing to make you an authorized user on one of their cards. When they add you to their account, the card gets added to your credit report. If that account is well-established and in good standing, it will automatically boost your score.
2. Get a credit card
Many young people don’t get a credit card as soon as they reach age of majority, but it’s a smart idea to sign up for one. You can begin building your credit history by borrowing and repaying money every month. Over time, this will give your credit issuer the confidence to increase your credit limit.
Sometimes, it’s hard for students to get credit cards because they don’t have income from a part-time job. In this case, consider getting a secured credit card. These cards require you to put down a security deposit that is often equal to or greater than the card limit. Some issuers will offer you the opportunity to graduate to unsecured credit cards once you’ve built up your credit.
However, do your research before signing up for a card. Make sure it’s one that you would be willing to keep for a long time. For that reason, avoid cards with high annual fees or interest rates.
If you're still having a hard time figuring out which card you should apply for, check out this guide to the best credit cards for first-year university and college students.
A great option for students is the Tangerine Money-Back credit card, as it has one of the most flexible cash-back options out there. With the card, you can earn cash-back on everything from restaurants and groceries, to gas and public transportation. You can even earn on entertainment purchases. You can select two out of 10 available cash-back categories, and those two categories will earn you two per cent cash-back or “Money-Back Rewards” right away. And if you set up your cash-back to automatically deposited into a Tangerine savings account, you can also select a third category that will give you two per cent cash-back. All other purchases earn you 0.50 per cent cash-back.
3. Limit applications
If you’re in the market for a credit card or any other type of loan, apply for one at a time. Applying for multiple items all at once impacts your credit score. Think about it: a credit score is supposed to gauge how big of a credit risk someone is. So if you’re applying for multiple sources of new credit, this could indicate that you’re in financial trouble. For that reason, limit your applications.
4. Keep your utilization low
If you have a credit card, it’s important that you keep your utilization low. The percentage of credit that you use is a key factor in determining your score. As a student, aim to use up only 20 to 30 per cent of your credit limit. For example, if your limit is $1,000, only charge $200 to $300 to the card each month, even if you pay it off entirely at the end of each billing cycle. If you need to put more than that on your card, charge increments of those same amounts and then immediately pay it off online. Once the payments clear, you can charge more.
5. Increase your limit
Because it’s important to keep your credit utilization low, having a higher credit limit allows you to spend more on your card each month. For that reason, you might want to ask your credit card issuer for a credit increase about once every six months. However, ensure that they don’t need to do a hard credit check in order to approve it.
Sometimes companies will pre-approve you for increases based on your repayment history. Should they contact you directly and offer you an increase – say yes!
6. Pay your credit card off each month
A credit card isn’t free money and it’s not a smart way to get out of a financial jam. For this reason, it’s important to pay off your credit card in full each month. Carrying charges on your card could hurt your score. If you absolutely can’t pay it off in full, you must make at least the minimum payment. Not doing so results in financial penalties, interest and a lower credit score.
7. Take out student loans
Just those two words “student loans” may bring about some anxiety, but there’s a silver lining: they help you build credit over the long term. That’s because having a variety of credit sources ultimately helps to build your score. While you shouldn’t get a student loan unless you absolutely need one, making those loan payments on time once you graduate will give your credit score a boost.
This post has been updated.