When my husband wanted to propose to me, we were just finishing up college. He went to a jewelry store at the mall and picked out the prettiest engagement ring he could reasonably pay for with a payment plan. He provided his Social Security Number for the credit check — but was disappointed to learn that his credit history was not long enough to qualify to buy the ring on credit.
If you’re a college student or around that age, you may not realize how important credit will be in your adult life. Probably a diamond ring isn’t the smartest thing to buy on credit anyway. (He ended up proposing using a ring that some student had made in art class and left behind, and I cherish it.) But you’ll need an established credit history to rent an apartment without a co-signer, get a car loan, refinance your student loans, or buy a house. And a credit card is a good place to start building credit.
So take these steps to get started on a lifetime of high credit scores and clean credit reports.
1. Make sure you’re old enough
I was only an 18-year-old college freshman when I signed up for my first credit card in exchange for a free bottle of soda. But that was before the passage of the Credit CARD Act of 2009. That regulation sets the minimum age for getting your own account at 21, unless you can prove that you have sufficient income to pay off a credit card or you can get someone to help you in one of the ways outlined below.
2. If you’re not old enough, start with a partner
There is an argument for getting started as soon as possible, even before age 21, as long as you are mature enough to handle a credit account. That argument is that 15 percent of your credit score is based on the age of your accounts. This means that even when you’re 50, your credit score might be a tiny bit lower if you put off opening your first card until age 25 instead of getting right to it at age 21 — or 16.
If you are under 21 and do not have a regular source of income, there are several ways that a parent with established credit can help you get a card.
Become an authorized user
This is a baby step toward using credit, one that I’ve even entrusted my 13-year-old with. An authorized user gets a nice shiny card that they can present at the cash register to buy things, but the user has zero legal responsibility for paying the bill.
How could this help you build credit? When you are added as an authorized user to an account with a clean payment history, your own credit may benefit in several ways. The credit bureaus recognize that you have access to credit, and some of the cardholder’s good behavior may get attributed to you.
But keep in mind that their bad behavior could get recorded on your credit report as well. If your parent, older sibling, or girlfriend has a history of missed payments or accounts in collections, getting an authorized user card on their account will not help you.
Since the bills will be going to your parent or whoever else made you an authorized user, you’ll have to come to an agreement with them whether you must pay them back for the charges you incur. Some parents who would have otherwise sent their kids cash at college simply set a limit on how much the student is allowed to charge each month, and pay the bill themselves.
Get a co-signer
If a parent cosigns for a credit card account with you, it means that you are both equally responsible for paying the bill, and the payment record will show up on both of your credit reports. If your goal is to build up a record of on-time payments, getting and conscientiously using a card with a co-signer can achieve that.
Adults who cosign with their kid should be warned that if the kid doesn’t make the payments, the parent’s credit could suffer — and the card issuer may not notify you that the kid isn’t making payments. When the minor turns 21 and is ready to fly on his or her own, you might be able to get the bank to remove the co-signer’s name from the account, or you might have to pay off the account and close it, then have the young adult open a new account on their own. (See also: Should You Cosign Your Teen’s Credit Card Application?)
Get a guarantor
A guarantor is like a co-signer in that she is responsible for paying the debt if you don’t. But unlike a co-signer, she doesn’t have the privilege of adding charges to the account. It’s also different from a co-signer in that the bank is supposed to exhaust other means of getting the cardholder to pay before they go after the guarantor.
3. Apply for a secured credit card
If you are old enough to apply for that first credit card on your own, don’t bother applying for one of those high-end cards with all kinds of great perks. In fact, you may have to start with a secured card, which requires that you put down a refundable security deposit of anywhere from $200 to several thousand dollars. Often, the credit limit is equal to the deposit, so the card issuer is protected if you don’t pay.
Research secured cards carefully, as some of these low-end products have high fees or interest rates. But there are good ones out there. Some secured cards even pay rewards points. Just don’t get so distracted by rewards that you ring up charges you can’t pay off by the end of the statement period. You’ll be charged interest, and those charges usually far outweigh the value of any rewards you earn.
4. Make regular payments
No matter how you get that first card, the key to building up a good credit history is making on-time payments. Payment history is the single biggest factor in a FICO credit score, weighing in at 35 percent. (See also: The 5 Things With the Biggest Impact on Your Credit Score)
Remember that you are responsible for paying on time even if the bill arrives in the mail late or gets lost. Many cards offer text or email alerts to remind you when the payment is due. You can also set up an autopay from your checking account so that your payment is never late.
5. Pay in full each month
You’ll notice when you get your first bill that you’re not necessarily required to pay for everything you charged that month in order to be considered on time. Most cards allow you to make a minimum payment now, and pay the rest off later.
This is a bad idea. Not only will you incur interest charges if you do that, but it can also slow down the improvement of your credit. That’s because the balance you’re carrying will appear on your credit report as part of your total debt. Your credit utilization ratio is the second biggest category affecting your FICO credit score after payment history. Basically, the more of your available balances that you’re using, the worse it is for your credit score.
6. Get out of the dorms
Living in the dorms does nothing for your credit score. But if you get an apartment and pay the rent on time, those payments can go down on your credit history just like on-time credit card payments.
Of course, if your name is not on the lease and you just pay your roommate cash each month, it’s not going to help your credit report. Also, not all landlords report rent payments to the credit bureaus — if you’re serious about building credit and confident that you will never pay late or break the lease, consider asking your landlord or property management company to start reporting.
Just like that first credit card, you may need a parent to cosign your lease with you. (See also: How Alternative Credit Data Can Help Those With Little or No Credit)
7. Keep your charges low
Just because you have access to a line of credit doesn’t mean you should use it all — even if you can afford to pay it at the end of the month. Credit utilization makes up 30 percent of your score. The rule of thumb is to use no more than 30 percent of your available credit, but it’s even better if you can use 10 percent or less. So if you have a $1,000 credit limit, you should only be charging up to $100 in a month.
8. Consider asking for a credit limit increase
Having a higher credit limit can increase your score in the long term, because if you keep your charges at the same level, you’ll be using a smaller percentage of your newly enlarged available credit. However, there’s also a downside to asking for a limit increase: Your card issuer will probably do a hard credit check to verify that you’ve been using credit wisely so far. Credit checks can cause a small, temporary dip in credit scores.
So what to do? First of all, don’t ask for more credit unless you’re pretty sure the answer will be yes. Wait until you have been using your card responsibly for a year with no late payments. You can call and ask your credit card issuer if they will do a hard credit check when deciding on a credit limit increase. If they say no, there’s no risk at all.
If you decide to ask for an increase, Credit Karma offers good step-by-step instructions for making the call. (See also: 4 Questions to Ask Before Getting a Credit Increase)
9. Don’t open a card every time a store clerk offers you one
Often when you’re checking out at a store or even online, you’ll get an offer of a discount in exchange for taking out a store credit card. Be cautious with these if you are just getting started. Just like with asking for a limit increase, you get a hard credit check every time you apply for a new card. If you have too many credit checks in a short time, it may look like you’re desperately applying for a lot of credit because you can’t pay your debts. (See also: Store Credit Cards That Don’t Suck)
New credit is not the biggest factor in your credit score, but if you are trying to build it, you might as well be conservative. Besides, having too many credit cards can make it hard to keep track of what you owe and remember to pay the bills on time.
10. Understand that your debit card is not a credit card
Many students set up a checking account on their first day at college and receive a debit card that they can swipe at store registers as if it were a credit card. It’s not. Because a debit card withdraws money from your checking account as it’s used, it does nothing to show that you can handle credit, so the credit bureaus don’t count debit card use on your credit report.
Another thing to keep in mind is that debit cards are riskier to swipe and use online than credit cards. A crook with your debit card information could clean out your entire bank account if you don’t notice the theft right away, causing you to miss your rent or other important payments while you sort out the problem.
Also, credit cards and debit cards are held to different standards when it comes to covering fraud against consumers. By law, credit card issuers cannot hold you liable for more than $50 of fraudulent purchases, but in reality, most card issuers have zero-liability policies that will absolve you of any responsibility for paying for fraudulent purchases. The law also protects credit card users against fraudulent charges better than debit card users. (See also: Credit Cards vs. Debit Cards: A Comprehensive Comparison)