I’m Still in College, Why Do I Need to Build Credit?

It may not seem important to build credit in college, but your future self will thank you.

College students already have a lot on their mind — career paths, majors, student loans, grades — but should credit be on that list? In college, your credit score is probably far in the back of your mind, if it’s there at all. But If you want to really get ahead and start post-grad life off on the right foot, consider starting to build credit in college. When you’re still in college, credit is often deemed a “future problem.” It’s a distant thing for real adults looking to buy houses. That’s all true, but it also plays a big role in anyone’s life, even college students.

Building History

Length of credit history is 15% of your credit score, which is a pretty big factor. The longer you have credit history, the higher your credit score is likely to be. It’s possible to build a good credit score in a year or two, but it can take years to build an excellent credit score. Starting early and being diligent can help you build credit history before you need to seriously worry about your credit score.

Choosing a Home

Many landlords require good credit to rent an apartment. Landlords use credit scores to predict whether tenants will make rent payments on time. Without a credit score, you’ll have to work extra hard to prove your trustworthiness and financial stability. Having a low credit score can lead to rejection or even a higher security deposit. It can also be easier to get a lease when you’ve got a few years of positive credit history under your belt.

Credit scores may be even more important when buying a home. The higher your score, the more likely you are to qualify for a mortgage and the better the terms you’ll receive. Kelan Kline, half of the personal finance blogging duo behind The Savvy Couple, can attest. He and his wife built their credit in college and at 23 years old, they bought a house. “The craziest part is I had just got my job and had no paycheck to show my income,” Kline said. “They used our credit scores and my job acceptance letter showing the income I would receive to get pre-qualified.” For the Klines, good credit scores made all of difference and they can make a huge difference for anyone entering the housing market.

Finding Employment

In most states, potential employers can check your credit report and even factor it into whether or not to hire. Having a good credit report is an indicator that you’re dependable. It can also be something that differentiates you from other candidates. While not every employer will check, it could potentially happen and it’s best to make sure your report is free of errors when applying to jobs.

Making Student Loan Decisions

If you plan on potentially refinancing student loans, it’ll be more difficult to do so without a solid credit score. Refinancing can help you lower the rates of your loans and potentially help you speed up the repayment process.

Saving on Insurance

At a certain point you’ll have to move off of your parent’s insurance plan and, when you do so, it’s in your best interest to have a good credit score. When your credit score is higher, you’re viewed as less of a risk to insurance companies, giving you lower premiums. This even applies to car insurance — many U.S. car insurance companies use credit scores to help determine risk.

Getting a Car

If you’re hoping to buy or rent a car down the line, having a good credit score is crucial. While you can likely find an auto loan regardless of how low your credit score is, a better credit score means a better interest rate and more options to choose from.

Starting a Business

When you build credit in college, you’re setting yourself on solid ground for future endeavors. If you’re a young entrepreneur or aspiring business owner, it can really pay off. If you need a business loan to launch your first business, you’ll need to have a decent credit score to qualify.

Overall

Even if your near future doesn’t immediately require an amazing credit score, starting now is a smart decision. Lenders and employers use your credit score as a sign of financial stability and reliability. In any situation — loans, rentals, employment or otherwise — it’s a valuable asset to have.

There’s good news for any college student who’s looking to embark on the credit building journey. There are plenty of ways for new users to build credit in college from being an authorized user to using a secured card. Building credit doesn’t have to be expensive and you can check two of your credit scores for free on Credit.com to keep track of your progress.

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6 Ways Student Loans Could Impact Your Credit Score

ways-student-loans-could-impact-credit

When most 18-year-old college freshmen sign on the dotted line to take out federal student loans, they’re not thinking about credit scores. They’re thinking about class schedules, life goals and avoiding the infamous “freshman fifteen.”

But the truth is that student loans can (and do) impact your credit scores from the very moment you take them out. Whether you’re a brand new college student who hasn’t even started repaying student loans yet or a 30-something still struggling to pay back that debt, you need to understand how student loans can impact your credit scores and your ability to borrow. (You can see how your student loans may be affecting your credit by viewing two of your credit scores, updated every 14 days, on Credit.com.)

1. They’ll Likely Open Your Credit File

Most straight-from-high-school college freshmen don’t have a credit file to speak of before taking out student loans. But because the federal government doesn’t require good credit for most types of student loans, that doesn’t matter. As soon as you take out a loan, you’ll have a credit file opened, likely with all three major credit reporting bureaus. This is the start of your credit history and subsequent numerical credit scores.

2. They Can Help Establish a Longer Credit History

One portion of your credit scores comes from the length of your credit history. The longer you’ve had credit, the higher your score will be. For many students, student loans are their first piece of credit. And because they’re likely to stick around on your credit reports for ten years or more while you’re in repayment, student loans can give your score an automatic lift.

3. On-Time Payments Can Keep Your Score Growing

On-time payments are the most heavily-weighted portion of the credit score algorithm. After all, lenders want to be sure you’ll repay your loans on time each month. Paying your student loans on time from the time you enter into repayment can keep your credit scores growing, slowly but steadily.

One thing to note here is that if you have to put your loans into deferment or forbearance due to financial hardship, this shouldn’t harm your credit scores. Call the lender as soon as you know you’ll be unable to keep making payments. They can put the loan into forbearance, which will stop payments for a while. This doesn’t get you out of repaying the loan, of course, but it will save you from late payment reports on your credit scores.

4. Missed Payments Can Quickly Tank It

Steadily repaying your loan with on-time payments will increase your scores, but slowly. On the flip side, missing payments can tank it, and quickly. However, most federal student loan servicers won’t report a payment as late until it’s been 60 days late by the end of the month. So you often have more grace with these loans than other types. Still, it’s best to get into the habit early on of making on-time payments each and every month.

5. They Can Help You Add Variety to the Mix

A few high school and college students have other debt coming into the student loan process. For instance, you might have a low-limit credit card on your report already. If this is the case, adding student loans as an installment loan can add variety to your credit file. Because variety is one thing lenders look for, this can also help boost your credit scores.

6. Resolving Delinquency Can Immediately Increase Your Score

Resolving delinquency on other types of loans isn’t always easy, and the delinquency reports may take months or even years to recover from. This isn’t always the case with student loans. If you lose your job, for instance, and miss three months’ worth of payments, your score will quickly fall. But if you later work out with your lender to back-date the deferment of your loan, they can forgive those late payments, effectively erasing them from your credit scores.

It’s better to never become delinquent on your student loans, of course. But if you do, resolving the problem as quickly as possible can help you increase your credit scores almost immediately.

Bonus: Your Debt-to-Income Ratio Can Be Important

It’s a common misconception that a person’s debt-to-income ratio — the amount of your minimum payments each month versus the amount of income you make— is a part of your credit scores. It’s actually not. Credit bureaus don’t know how much money you make, and they don’t really care. As long as you’re meeting your obligations each month and your credit utilization rate is in good shape, your credit scores should stay intact. (Note: Your credit utilization rate, also referred to as your credit-to-debt ratio, is essentially how much debt you’re carrying versus the amount of credit extended to you. For best credit scoring results, it’s generally recommended you keep the amount of debt you owe below at least 30% and ideally 10% of your total available credit limit.)

Lenders, on the other hand, care about debt-to-income ratio very much. If 50% of your monthly income is eaten up by minimum debt payments, you’ll likely have trouble obtaining a mortgage.

So even though your minimum student loan payments in comparison to your monthly income don’t affect your credit scores, they can affect your ability to borrow. This is why it’s so important when taking out student loans to examine how much your chosen career is likely to earn you. Then, compare that to what you’re likely to pay in minimum student loan payments before you sign on the dotted line for that loan.

Image: sturti

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