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Building your credit

Our expert advises the best way to build your credit

Let’s be honest: building your credit history can be a real challenge for students. Where in the world do you get started?

Using credit is the only way to build your credit history. Credit scores aren’t even generated until you’ve had credit for at least six months—and you need to continue using your credit lines to keep those accounts updated. As long as you keep your credit balances spread out and preferably under 30 percent of your total credit limit, paying off the balances each month—and you pay off bills or installment loan payments on time—you will be on the path to a building credit history long before you graduate.

Here are several concrete steps to build your credit history. Just be careful about applying or opening too many lines of credit at once, which can negatively impact your credit score!

Open checking and savings accounts. If your bank has an issue with your age or lack of credit history, consider opening a joint account with an adult at first. Having bank history will help to build your credit history. You may also become an authorized user of another adults’ credit and/or debit card. For more details, check out the resources in the iGrad Financial Literacy Library.

Find an adult with good credit history to co-sign a loan or add you as a joint cardholder to his/her credit card. This is a way to take advantage of their good credit while building your credit. You get the benefits, access to credit and a boost to your own credit score. Of course, the major qualifier here should be obvious: Don’t default on payments! If you do, not only do you suffer, but your co-signer suffers equally.

Get a credit card as soon as you can. Sounds counter-intuitive, right? But it can actually be easier to get a credit card (after you turn 21) if you’re still in school. Lenders are more willing to take risks on you because they figure mom and dad are footing the bills, or at least helping, whereas it can be tough to get a line of credit after you graduate—unless you land a great job and salary right away.

Get a secured credit card. A secured credit card basically means you deposit the money equal to the credit limit in advance. It can be difficult to find a good deal on a secured credit card now, so beware frauds, scams and too-high fees or rates. But if your credit union or bank can help, this is a good way to get a card opened. Make sure the card has no application fee, a low annual fee, converts to a regular card after a year or so of on-time payments, and—most importantly—that it reports to all three credit bureaus!

Get a department store or gas card. Minimal impact on credit score, but better than nothing. Provided you pay off your balance every month, using this type of card can still help to build your credit history when you’re a student.

Apply for an installment loan. One of the keys to building excellent (vs. average) credit history is to vary the types of credit lines you have. An auto loan, personal loan, student loan or mortgage is an “installment loan,” with a fixed number of equal payments over time. If you don’t need or want a student loan, consider a small personal loan over a short time period to reduce the interest you pay. This will help establish your credit history and diversify your credit lines. Don’t borrow more than you can repay!

Pay your bills on time—all the time, no matter what! And make sure you have at least one or two bills in your name, so it counts in your favor—whether utility bills, student loan payments or cell phone bills, good payment history will help build your credit history.

Dispute errors or mistakes on your credit report. You can check your credit report from all three credit reporting agencies once every 12 months, and it’s free at AnnualCreditReport.com. If you see anything amiss—even if it’s a legitimate mistake—dispute it in writing to the credit reporting company. Include documentation or proof, if you have it. The reporting company is required to investigate. (You can also file a dispute with the information provider or lender.)

Establishing credit history takes time, but if you follow these guidelines and make sure to use credit regularly but sparingly, you can begin to build a positive credit history and a high credit score. And when your credit score is the only thing between you and that loan, car, house or job, you’ll be very, very grateful you did!

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