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There are many things in life that are unfair between the ages of 18-21. No booze, no gambling, no bar entry. I know we are all upstanding citizens and we would never partake in those activities as a minor.
What’s even worse is that once you turn 18, financial institutions, insurance companies, and the whole world doesn’t trust you one bit. One way to start ‘building trust’ is that you need to build credit.
If you are a high school student readying up for college or just a young adult that is already in the workforce, getting a credit card is the fastest way to start building your credit score. Sure, student loans are also a way to build credit…buuuuut I’m not the best advocate for them.
It’s a catch-22. You want to build credit so you can get loans and better credit limits, but you need loans and higher credit limits to build your credit and can’t because you have no credit.
Welcome to real life! Don’t worry, I’ll give a walk through the basics of credit and provide some good student-friendly credit cards.
Building Your Credit: The Basics Of A Credit Score
Most of your life’s decisions will be dependant on your credit score. Your credit score will determine how much interest/additional you’ll be owing to a paying to an institution.
Poor credit score = higher interest rates, lower likelihood of getting loan approvals, limitations on credit limits, higher insurance premiums. In other words, you are penalized for not having any credit.
Good credit score = Better interest rates, lower premiums, friendlier terms, less likely to pay deposits on phones. You can also leverage credit cards & loans to catapult yourself into better financial situations.
What Determines Your Credit Score
Depending on which credit bureau (there are several, but the main ones are Transunion, FICO, Experian, Equifax) these metrics will vary. But for the most part, FICO mentions the following:
Payment History (35%)
Payment history is the most important factor in your credit score. Even missing one payment can have a large massive impact on your credit score. This mainly applies to loans and credit cards.
It doesn’t matter if you miss a payment of $1 or $1000, it will show up as a “missed payment” on your credit report on all credit bureaus. That’s why I always recommend making automatic payments vs manual payments.
Even one late payment can stick to your credit score for years. The last thing you want as a young adult is to tell the credit bureaus that you are not responsible with your money.
Credit Utilization (30%)
Credit utilization is the total amount of personal credit that you are using relative to your total available credit limit. You want to keep your utilization below 30% as a starting point. Also, utilization does attribute to about 30% of your credit score. That’s why most of my advanced credit card techniques require good credit with high credit limits.
While keeping utilization below 30% is a decent baseline, you can start seeing dramatic improvements on your credit score as you get below 10% utilization.
Example: Let’s say you are approved for a $400 credit card. If you spend $100 each month your utilization will be 25%. So you might expect to see a dip in your score. You can see a major drop in your score if you max out your credit card. Alternatively, if you only use it for Netflix each month, your utilization will be very low and your credit score will jump.
High utilization implies that you might not be responsible for your money and you are at higher risk of not paying your bills.
Credit History (15%)
When you start building your credit, your history will be super short. I strongly recommend getting Credit Sesame or credit karma for your free credit score. Even if you don’t have any credit, they provide additional tools and will keep track of your history as you progress.
As a student/young adult, you might see a lot of early fluctuation in your score because it’s so short. But as time progresses and you have loans/credit cards with on-time payments, your score will continue to rise and you’ll see less fluctuation.
Personally, I think this number could be higher for some bureaus. I also feel like age is also represented as part of your credit history. But that’s just speculation for me.
Credit Card Inquiries / Credit Accounts (10%)
Starting out you won’t have many accounts. But you want to create an established history of building credit. So any signal that implies that you are applying for too much credit/loans in a short amount of time will hurt your score.
While this isn’t a major factor, you will see a couple points knocked off each time a someone does a ‘hard pull’ and looks at your credit. Insurance quotes, applying for new credit cards and background checks might end up doing a ‘hard pull’.
Usually, these pulls stay on your report for 2 years and then vanish. Credit Sesame does soft pulls and won’t affect your score.
Other Credit Factors (10%)
Depending on the types of loans you get and your credit history, these play a part in the remaining portion of your score. As long as you don’t go into collections and pay your bills on time, there is nothing to worry about.
Quick Ways to Build Your Credit History & Get A Credit Card As A Student
The reason why I suggest getting a credit card to build credit is that it’s the fastest and easiest way to establish a credit history. Plus you can start learning good spending habits.
Be an Authorized User of A Current Card
This is the simplest and probably the easiest method to build credit. Have a family member (likely parents) to add you as an authorized user to one of their credit card accounts. It cost nothing and once you become an authorized user, that information will start being sent to credit bureaus.
In some cases, there might not be an age minimum so you can start building credit before you are 18 (depends on the card). You’ll receive your own card to use as you see fit. The primary cardholder is legally obligated to pay the bill. So while you aren’t legally responsible for paying for whatever you buy, you will be responsible for any lecturing you get from your parents.
Apply for a Student Credit Card
Besides being an authorized user on a credit card, I’m all about getting a student credit card as a way of getting your first credit card and building credit. There are a lot of student credit cards out there that don’t care if you have no/short credit history. The key is that you are finding a credit card that is student specific.
Your credit limit will suck. It might be between $200-$500. But I would prefer that as a way to control spending compared to a secured card where you might need to pay $100-$400 for a card.
Plus, some of these student credit cards offer decent bonuses. So If you are on the hunt for a credit card, I recommend applying for one of these cards.
- Discover it® Student Cash Back – You can get a 5% cash back in certain categories throughout the year! Plus you get an unlimited 1% cash back on all spend. Bonus $20 statement credit each school year with a 3.0 GPA or better.
- Journey® Student Rewards from Capital One® – Earn 1% cash back on all your purchases. Pay on time to boost your cash back to a total of 1.25% for that month. No fees.
- Capital One® Platinum Credit Card – While you might not think this is a student credit card, this credit card doesn’t need a long credit history for you to apply.
Apply for Retail Credit Card
If you aren’t sure if you want to apply for a student credit card. A great alternative with a high success rate is applying for a retail store credit card.
You know whenever you go to Target or any other retailer and they ask, “would you like to get a [store name] credit card?”. Well, instead of saying no before they finish asking the question, consider saying yes.
Even with no credit history or bad credit, you have a very good chance of being approved. Your limit won’t be much. But you’ll have a bonified credit card. There aren’t many benefits to these cards other than to build history.
Simply use the card once a month and pay on time (automatic payments). After a few months, your credit score will be fairly solid. You can continue to go after student credit cards or start getting more popular credit cards that you see on tv.
Get Secured Credit Card (Not Preferred)
Personally, I would recommend getting a student credit card or retail card over a secured credit card (assuming you are of age). While secured credit cards can help establish your credit history, you will need to pay an upfront cash deposit.
You can use your secured credit card to make a purchase, but your cash is held, hostage. I get it, it helps to make sure you can pay your bills since younger people are at a higher risk of not paying. But I’m not really a fan of the “pay to play” method.
Since these cards are designed to establish and build your credit history, you only need to have this card for several months. Usually sticking with bigger institutions allow for more flexibility with cards. My everyday card happens to have both secured and unsecured credit card: Discover It would be my go-to for a secured card.
Generally, a secured card is for those with terrible credit and need a place to start building good credit. It’s not really applicable for young adults without much history.
Step By Step Gameplan
If you are between 18-24, you can do the following.
- Get Credit Sesame or Credit Karma to see if you have a credit history.
- See if you can be an authorized as a user for a credit card (preferably parents).
- Students -> Focus on the Discover IT Student Card. Non-Student -> Go to Target or another retailer and Apply for a Retail Credit Card.
- After Approval, use your card 1-2 times a month (mainly for Netflix or something small).
- Set up automatic payments to ensure on-time payments.
- After 6 months, your credit score will improve. Then look at getting more traditional credit cards (Chase Freedom, Bank of America Cash Rewards).
Always keep track of your credit score. Since Credit Sesame is free, you should have no reason to not pay attention to it.
Hopefully, I’ve been able to help point you in the right direction! Got any other credit cards that are student friendly? Let me know in the comments.
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