Having good credit is an essential part of living in the modern world. If you ever want to get a low-interest home loan, car loan or credit card in the future, you’re going to need a way to prove to the bank that you are a trustworthy borrower. The only way to do this is to build up a high credit score, which takes a little bit of time to do. The sooner you get started, the better off you will be.
Here are five easy ways to build your credit in college.
1 – Secured Credit Cards
A secured credit card is the only type of credit card in the world that you are guaranteed to be approved of no matter what. That is because you put out the money to use for the line of credit. When you apply for a secured credit card, you will be asked to make some sort of deposit – usually $500 to $2,000. This is the money you will be able to spend on your account. If you spend a portion of it, you will need to make monthly payments with interest much like you would on a traditional credit card. The only catch here is that when you decide to cancel your card, you get back whatever money is left on the account from your original deposit.
The Downside: Secured credit cards should not be confused with prepaid debit cards that you can load and unload at any time. Everything acts like a normal credit card here, which means you will get bad credit if you miss your payments. Pay at least the minimum each month to avoid credit issues.
2 – Rent-to-Own Furniture
Rent-to-own furniture like what you might find in Aaron’s or Rent-A-Center can be a solid source of credit for you. As long as the company you are working with reports positive payments to the credit bureau, you will be able to build up your credit score every time you pay on your furniture account. This option works well for college students specifically because most of them don’t have the spare cash to pay for a large piece of furniture upfront. You can get a couch or TV you like for $50-$150 a month, and then all you have to do is pay it off over time.
The Downside: If you decide to pay during the 90-120 day “same as cash” period that most rental furniture stores offer, you will not get any credit from your payments. You have to enroll in an actual monthly installment plan to do this. You will pay a lot more for your furniture this way, but at least you will be able to build your credit.
3 – Small Car Loans
You can qualify for a car loan without having credit, depending on how you want to go about the process. Here are a few options to consider:
- Get a car loan with a cosigner who has strong credit, keeping in mind that this person’s credit will be affected if you fail to make your payments.
- Buy a car from a buy here pay here lot, which will require a decent sized down payment and may charge high interest. Make sure the dealership you work with does in fact report to the credit bureau because a lot of them will only do so if you default on your loan.
- Get an auto loan through a subprime dealer who will focus more on your income than your credit. Again, this option will likely come with a high interest rate.
The higher your down payment is, the more likely you are to get a low interest auto loan right from the start. You will also have better options if you have a longstanding job history or a great cosigner to back your loan. Since you’re going to need a car anyway to get around, you might as well build some credit because of it.
The Downside: Buy here pay here dealerships are known for selling bad cars or for running scams to lock innocent people into long-term, high-interest loans. The interest rate you pay at one of these places will be high no matter what. Be extremely careful about what you buy at any subprime establishment, and work at paying the loan off as quickly as possible.
4 – Entry Level Credit Cards
Many credit card companies offer entry level credit cards for college students and young adults who have not had a chance to build their credit yet. These cards usually have low limits between $250 and $500, and they rarely have any perks that come with them. You could apply for a couple cards like this and see what you qualify for, but make sure the cards accept people with bad credit or no credit before you apply.
After you have had an entry level credit card for six months to a year, you should be able to apply for a credit extension. This will raise your limit, probably to $750, and give you a better chance at building your score. Soon enough, you will be able to apply for a bigger credit card with rewards built right in.
The Downside: After the economy crashed in 2008, creditors have tightened their approval standards tremendously. You may have a difficult time finding a card to qualify for. If possible, add a cosigner to the card with good credit to avoid getting declined.
5 – Small Personal Loans
Taking out a small loan with your bank is also a good way to build your credit in college. The amount of money you take out in the loan will depend on what you want to pay back and what your bank will allow you to get. Don’t just get a loan to blow the money away though. Use that loan money to pay back the loan, plus a little of your own money for interest. This will guarantee that you don’t go into default and ruin your fresh credit.
Try this setup out for paying back personal loans:
- Apply for a $500 loan with your bank for a 6-12 month term.
- Find out what the total amount paid will be at the end of the term if you decide to pay the loan out.
- Deposit all $500 in a savings account, plus whatever else you will need to match the total amount you’ll owe. (If you don’t have the extra cash right now, save and deposit it as soon as possible.)
- Set up an auto-payment that pulls the money from your savings account every month to pay for your bank loan.
- Check your credit score 30-60 days after your final payment to see what it looks like.
If you can stick with this process and make your payments on time every month, you will soon be able to build a lot of credit for the future.
The Downside: You are essentially paying the bank to give you credit. This is the only option on our list that you don’t really get anything out of. If you can get past that though and abide by the steps above, you should be able to rack up some decent credit in a short amount of time.
Building your credit in college will set you on the right track for a strong financial future. Click here to sign up for Tuition.io’s free student loan tool. Also read our blog often for lots of student loan advice and money saving tips.