Building Financial Wealth for College Bound Students
We are excited to announce a partnership with Maia Wealth! Giving our clients access to up-to-date, relevant information on the financial aspects of college planning.
Thank you, Mark B. Candler, MBA®, CLTC®, for writing this amazing blog, that addresses the questions of many parents who are launching their students in the next few years! Mark and his team are an amazing asset to our community. Mark is also a passionate fly fisher, father of two vibrant students (and a loyal fan of Emerging).
If you want to learn more about launching teens into college and beyond register for our upcoming Lunch and Learn Webinar on Feb 23, 2023, at 12:00 p.m.
If you are interested in an ongoing community of resources, please join our subscription-based parent community for quarterly webinars, articles, and resources!
Helping College Students Build Their Credit Scores and Financial Responsibility
By Mark Candler
A good credit score is key for a lot of important things in life. It will come into play when you apply for a car loan, a mortgage, and credit cards. However, a good credit score may also be a factor in ways that you haven’t thought of. For example, some rental properties will use your credit score as a determining factor in their decision to rent you an apartment, and some cellphone providers check your credit to decide whether you can get financing on a phone.
The sooner you start building your credit, the more time you have to work towards building a great credit score. Here are some things you can do to start the process.
Become an Authorized User
Having a parent or guardian add you as an authorized user on their credit card can be a great way to start building your own credit. As an authorized user, you’ll have the benefit of your own credit card and access to the primary cardholder’s credit limit. However, you won’t have any legal responsibility to pay off the debt on the credit card. In fact, you don’t actually have to use the card at all to reap the benefits of activity on the account towards your credit score.
If you are looking into this option, make sure the credit issuer reports authorized users to credit bureaus as this is not always the case. If authorized users aren’t reported, you won’t see any effect on your credit report.
Open a Student Credit Card
Card issuers know how important it is for students to have access to credit. Credit cards don’t just help with building a credit score, but can also help take care of daily expenses. For this reason, many card issuers have special student credit cards matched to students’ needs.
Student credit cards don’t require a previous credit history to apply and often offer school-related perks like cash back for good grades. Some student cards offer other benefits too, like increasing your rewards rate for making payments on time. When used responsibly, using a student credit card can help you grow your credit score.
Open a Secured Credit Card
A secured credit card is another option for building credit if you don’t have a credit history or if your credit score took a hit at some point. You are almost guaranteed to be approved for a-secured credit card offer because of the way secured cards are set up.
Much like a debit card, a secured credit card is backed up by your own cash, paid in the form of a deposit. This deposit will serve as part or all of your credit limit. The difference, however, is that secured credit card activity is reported to credit bureaus. Using your secured card to make small daily purchases is a great way to build your credit score and have access to unsecured credit cards in the future.
Get a Cosigner
Much like with loans, you can have someone cosign on a credit card for you. You won’t have as many options for credit cards, though.
When you open an account with a cosigner, you are the primary cardholder. You’re responsible for handling all charges on the credit card and bills will be sent to you in your name. However, in the event that you miss payments, your co-signer is liable for paying off the debt on the account. For this reason, it may be difficult to find a cosigner as there are some risks involved for anyone who agrees to do so. Don’t Apply for Too Many Cards at once.
Once you’ve been approved for your first credit card, it may be tempting to apply for another. However, it’s not advisable to apply for multiple credit cards in a short period of time for a number of reasons.
For starters, applying for multiple credit cards in a short period of time can be a red flag to card issuers. In fact, some card issuers have policies discouraging multiple applications. If you add a credit card to your wallet you are adding the possibility of more debt. That’s a lot of responsibility to take on as a student, especially if you don’t have full-time income.
It’s also not great for your credit score. Each time you apply for a credit card, a hard inquiry is made into your credit report. Hard inquiries lower your credit score in the short term and multiple inquiries can make you look like a credit risk in the long term.
Maintain a Solid Payment History
Keeping up with your credit card payments is the most important factor in building your credit score. Payment history makes up 35 percent of your credit score calculation and is a sign that you know how to use credit responsibly. Using credit responsibly really comes down to making purchases you can pay off. While it may be tempting to use your credit card to buy big-ticket items, that could easily lead to a bill you don’t have the resources to pay. It also takes away from your available credit that you may need for something else.
Instead of making large purchases, use your credit card to make small purchases that you know you will be able to pay off. If you want to use your credit card to buy a higher-priced item, come up with a plan for how you will repay the charges before you make your purchase. Missing a payment, making a late payment or even making less than the minimum payment on your bill is all reported as missed payments to credit bureaus. This will put a dent in the credit score you are trying to build and could leave a mark on your credit report for up to seven years.
Spend Responsibly
You may be thinking that in order to get your credit score up, you have to use your credit card a lot. However, credit scores are based on consistent account activity, not high numbers. And the two main factors in calculating your credit score are payment history and credit utilization.
Paying your bills is important, but not overspending is just as important. Credit utilization is how much credit you have versus how much credit you spend. It’s recommended to keep your credit utilization no higher than 30 percent of your total available credit. That means if you have a credit card with a $1,500 credit limit, you would use no more than $500 of it at a time.
A rule of thumb for keeping your spending in a healthy place is to use your credit card like a debit card. Only make purchases that you know you can pay off. Keeping your credit utilization low and regularly paying off your credit card purchases will keep your credit account active and your credit score in a good place.
Keep an Eye on your Account
Monitoring your credit card account is one way to keep up with your purchases, rewards and bills due dates. It’s a good idea to log in to your credit account frequently to check transactions and your balance. You may even be able to set up notifications for each time a purchase is made on your card. This will help you keep track of your spending, your balance and notify you of any fraudulent purchases quickly.
If you notice any suspicious charges, you want to report them to your card issuer immediately. It is possible that your account has been compromised. Not reporting suspicious behavior in a timely fashion could lead to your account being maxed out. Which will have an effect on your credit score because of someone else’s bad behavior. It could also take longer for the issue to be resolved and your score to recover.
Check your Credit Report
When trying to build up a credit score, it’s important to track your progress. One way you can do this is by requesting a credit report. You’re entitled to a free credit report from one of the three reporting bureaus (Experian, TransUnion, Equifax) once a year.
Checking your credit report will allow you to track your credit score and activity on your accounts. You’ll also get a breakdown of how you are doing with the major credit score factors which can help you continue to build your score.
The Bottom Line
Getting an early start on building credit can help you achieve your financial goals before and after graduation, as well as help you obtain financial products and lower interest rates in the future.
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