Understanding and Building Your Credit Score: The Guide for College Students

Proud College Students

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College can be one of the busiest times of your life. You have to juggle multiple classes, living on your own, maintaining a social life, all while trying to make big life decisions.

But there is one thing you may not have put a lot of thought into yet: your credit score. Credit is an important part of your everyday life and your financial future, even if you’re not aware of it.

It’s important that you understand what credit is, how to build credit, and what resources are out there to help you build your credit.

Disclaimer: This guide is intended to give you tips on how to build your credit score. Building credit takes a high level of financial responsibility.

We do not recommend following these tips unless you are in a position to pay off your debts and will utilize them in a responsible manner.

Part 1: What is Credit?

If you’re in college, you may have already taken over responsibility for your finances. Between the ages of 18 and 25, it’s extremely important to set yourself up for a stable financial future; good credit is part of that stability.

Credit is something that you should be interested in.

Credit is a measurement of your financial trustworthiness. Credit can affect many different aspect of your life like controlling how much money you can borrow, limiting what interest rates you receive, and even limiting which jobs you can hold.

Credit takes into account your entire financial history.

The earlier you begin to build your credit, the earlier you can take advantage of having good credit. This can save you large amounts money in the future, which allows you to save more money or spend it on something more important to you.

How Credit Saves You Money Throughout Your Life

Credit affects things like interest rates you can get on loans, including mortgages on your house.

One percentage point of an interest rate might not seem like a lot, but take a look at the math. Over a 30 year, $200,000 mortgage, the difference between a 3% and 4% interest rate could save you over $40,000 in interest.

This also applies to car loans and any number of personal or business loans you may want to get in the future.

House and Car Dream
To purchase a home or a car, you will need to get loans. Many loans require a credit history in order to obtain!

Once you have established your credit, you can acquire additional credit more easily than someone without any credit history.

Established credit translates into lower annual interest rates on your credit cards, which is useful if you don’t pay your balance off each month. Having a higher credit score can also earn you better bonuses and benefits if you are using credit cards to earn points and awards.

How Credit is Measured

Your credit is measured as a “credit score”; a number from 300 to 850.

Traditionally, you had to pay for your score through credit tracking agencies, costing you $10-20 per month.

Now, you can utilize financial tracking websites like Mint.com or a  number of credit cards that offer a monthly score report as a free part of their service.

But your credit score is only part of the picture. You should also check your credit reports, which give you an entire map of your financial history.

These reports include any credit card account you’ve had or currently have, how much debt you had at a given time, and any derogatory marks that may be hurting your credit.

These reports can be obtained annually for free through websites like free AnnualCreditReport.com; see the resources section for more details.

Why Credit is More Important in America

More so than most other countries, credit is extremely important in the US. Being highly capitalistic, the American economy relies on leveraging debt and credit. Americans use credit and debt to obtain loans for a car, a house, or personal projects. Your credit even determines your ability to rent in the U.S.

Your credit determines the interest rate you receive on a loan. Unfortunately, the worse your credit score, the more money you will pay in interest for any loan.

The good news is that you can take steps to actively build and manage your credit to ensure that you don’t spend all of your hard earned money on high interest payments. Or even worse, get declined for the loans or lines of credit you need.

Bottom Line: Credit is important to your financial future and can save you money throughout your life. Your score can range from 300 to 850, and you should check your score and your credit reports frequently to ensure you can get approved for future loans and credit.

Happy College Student
Your score can range from 300 to 850, and you should check your credit score and credit reports frequently to ensure you can get approved for future loans and credit.

Part 2: Building Credit Basics

Before getting into the details of how credit works, it is good to know some general ways that credit can be built. That way, when you learn about it more in depth, you will have points of reference to help you more easily understand the process.

Here are five different ways that can help you build your credit today:

1. Building Credit by Opening Credit Cards

Credit cards get a bad reputation because they can be a very dangerous tool if used incorrectly. However, if used wisely, utilizing a credit card to build credit is both incredibly easy and smart.

If you have a little credit, then you may be able to open a basic credit card. Also known as an unsecured card, many providers offer cards specifically for students for this purpose.

However, if you have no credit history, or you’ve already had credit issues, then you can start by opening what is called a secured credit card.

Hot Tip: For an in-depth look at your best bets, check out our article on The Best Student Credit Cards And How To Find Special Card Offers as well as The 10+ Easiest Credit Cards to Get Approved For

This is a card that you typically pay an annual fee for each year and has a very low spending limit that is tied to a deposit in a bank account. These cards’ main purpose is to help you rebuild your credit.

To build credit with either type of card (secured and unsecured), you simply need to make small purchases using your card, then pay off your balance in full each month.

This is the dangerous part: don’t be tempted to put everything on the card, don’t leave balances on the card, and especially don’t miss or skip payments.

By utilizing credit cards and paying off your balance, you will find your credit score improving within months.

Bottom Line:  Responsible use of credit cards helps to build your credit score. This includes paying them off each month or at least making the minimum payment.

Calendar Reminder to Pay Credit Card
Credit cards are a great way to build credit, but don’t hurt your financial position by putting money on the cards and accruing interest. Pay off whatever you use each time for the best results!

2. Building Credit through Student Loans

This option is very relevant to you as a student. Some of you may have student loans, and some of you may not. Some of you may be paying your parents off for loans they obtained.

If you can, take out your own student loans. This is an outstanding way to build credit given that student loans are flexible and can be easily opened while you’re in school.

These loans are easier to get due to the fact that they’re specifically for students trying to build a future for themselves with an education, which typically signals more trustworthiness.

Even if your parents are paying for your schooling, ask if you can take out the loan in your name and have them pay it off for you so that you can build your credit.

Bottom Line:  Paying off your student loans every month is a great way to build your credit score.

3. Building Credit through Other Loans

Student loans aren’t the only type of loan that builds credit. In fact, all loans build credit. So if you need a loan for a car, personal project, house, or anything else, then you’ll be building credit.

The issue with these other types of loans is that they rely on credit scores for approval more so than student loans. So if you don’t have any credit, you may have trouble getting these types of loans.

But if you can secure a loan, even a small one, then you will be on your way to building your credit score so that any future borrowing will be easier.

Bottom Line:  Obtaining and paying off other loans builds credit.

4. Building Credit through Help of Parents or Family

This option is a combination of the other options. Your parents or family can help you build credit in a few ways.

First, they can add you to their lines of credit as an authorized user. This is a much easier way to get access to a credit card, and you will build your own credit when using the card.

Simply use the card wisely, pay it off each month, and your credit score will improve.

Similarly, your family can cosign loans that would otherwise be difficult for you to obtain. This simply means they are guaranteeing you’ll pay your loan.

By doing this, you can obtain a loan and begin building credit by paying it off. Know that using this option is a risk for the cosigner: they are financially responsible if you don’t pay your bills.

Bottom Line: Having your family add you to their credit cards as an authorized user or cosign loans can help build your score without having to open your own cards or get your own loans.

Help from Grandma
If you can get help from your family to obtain loans, you will create an opportunity to build your own credit so that it is easier to do in the future!

5. Protecting Credit by Paying Bills and Utilities

Bills and utilities are a bit of a mixed bag. While your typical utility and household service companies (electric, gas, cable/internet, cell phones, etc.) can report your payment history, most do not.

This is simply because it costs them extra money and gives them extra responsibility in reporting and  maintaining these records.

However, by not paying these bills, you open yourself to lowering your credit score. By paying bills on time, you are showing that you’re financially trustworthy.

If a utility company happens to report your monthly payments, consider yourself lucky since this will be a positive thing for your credit report!

Bottom Line:  Bills may not improve your credit score, but they can hurt it if you don’t pay them off.

Part 3: How Credit Works, What the Scores Mean, and Credit Categories

Your credit score is a number that is based off a proprietary, complex algorithm. Originally developed by the Fair Isaac Corporation, known as FICO, your credit score can range from 300 to 850.

The higher your score, the more trustworthy you are to lend money to.

Along with your credit score, there are three main credit bureaus in the US. ExperianTransUnion, and Equifax give potential lenders information about your credit history, including all of your accounts and their own credit score calculation.

Lenders can purchase your FICO score and credit reports from these agencies.

Each credit bureau has their own credit score scale:

  • TransUnion: 100 – 900
  • Experian: 360 – 840
  • Equifax: 280 – 850

While other scores are available, these three, along with FICO, are the most widely used for determining creditworthiness. Your credit score is calculated and updated on a monthly basis, although it may be recalculated for other reasons.

The average credit score of Americans is anywhere from 687 – 695 [1, 2, 3]. The average is generally below 700 but it differs per agency and report. Credit Karma has a great graph of their average score by age range.

According to data from FICO, average and overall credit scores for all Americans are improving year over year.

This could perhaps be due to better education about credit. It could also mean the score ranges need adjusting.

Bottom Line:  FICO originated the credit score, which ranges from 300 to 850. The main three credit bureaus (Experian, TransUnion, and Equifax) use the FICO score as well as their own individual scoring algorithm.

Credit Score Die
The average American credit score is between 687-695.

What Your Credit Score Says About You

The FICO credit score was developed to look at an individual’s ability to pay their bills on time.

More specifically, it predicts whether a consumer will go 90 days or more past due within 24 months of the score being calculated.

The same credit score is interpreted differently by different lenders. Even though you may have obtained credit from one source, you may not from another, even if they’re looking at the same score.

To help reduce discrimination in credit scores, the US Government passed the Fair Credit Reporting Act (FCRA), which helps ensure the fairness, accuracy and privacy of your credit information.

A later amendment to this bill ensured that consumers were eligible to receive a free credit report once each year from each of the three major bureaus.

Prior to the early 2000’s, you were not allowed access to your own credit score. The FCRA also changed this limitation and ensured that you could purchase your own credit score.

Today, it has become a common practice among credit card companies and other financial services to provide you with a free credit score for utilizing their products.

In general, your credit score is a measure of your overall trustworthiness. The higher your score, the more a lender can trust you to repay the money you borrow.

This has important implications for your financial life. The better your credit, the less money you will have to pay back in interest.

Bottom Line:  The credit score is a prediction of whether you will go 90 days past due or more within the next two years. The FCRA helps protect your private information and allows you to see your credit score and report.

Credit and Interest Rates

One big reason to improve your credit score is so that you can obtain better interest rates on money you borrow, and in turn, this lower interest rate will save you money.

If you have a student loan, for instance, you will likely be paying that loan off for many years to come. To see how this plays out, here’s a hypothetical example of a student loan.

A college student, Susie, took out student loans to pay for her undergraduate degree. Over the four years she was in school, Susie accumulated $80,000 in debt.

Her interest rate is 6.8% and she has 10 years to pay her loans back. Her monthly payment will be $920.64, and over the term of her loan, she will pay a total of $110,477.25.

Not only is she paying back the $80,000 she borrowed, but an additional $30,477.25 in interest.

After building her credit for five years, Susie is able to refinance her loan. The new rate she was able to finance to was a 3.8% at a five-year payoff.

Assuming she has half her principal, or the original amount borrowed, left to pay off, her new monthly payment amount is $733.06. The interest she pays for the second half of the term is only $3,983.35.

While this is only a simplistic example, notice the difference between interest amounts. Susie will save at least $10,000 in interest due to her better interest rate, all because she improved her credit score.

Consider another example, taken from The Motley Fool.

The Motley Fool reported that, on a five-year loan of $20,000, a person with a credit score below a 660 would receive an interest rate of 10.385% compared to the 3.245% interest for someone whose credit score is above 720.

That comes to a difference of over $4,000 in interest over the life of the loan. These examples show why building credit is such an important part of your financial future.

Bottom Line: Lower interest rates can save you money! By having a better credit score, you will receive lower interest rates.

5 Major Credit Categories (Overview)

While the exact algorithm for calculating your FICO score isn’t publicly known, what is known is the basic categories that affect your score.

There are five categories in total and each has a different weight on your overall score:

  • Payment History:  a measure of how often you pay on time.
  • Credit Utilization:  a measure of how much of your credit you are using.
  • Credit History:  a measure of how long you’ve had credit.
  • Types of Credit:  a measure of the different types of accounts and your total number of accounts.
  • Requests for Credit:  a measure of how many new accounts you added or requested recently.

How you perform in each category determines your monthly score. However, negative marks on your credit can stay with you long after you made them, even if it was a one-time occurrence.

The following section will explain these more in detail.

Part 4: Detailed Explanation of the Credit Categories

It is important to understand each category in detail if you want to be able to take full responsibility for your credit.

Payment History

Your payment history is 35% of your credit score. Since this category is so highly weighted, it’s vital that you recognize the importance of your payment history.

Payment history is a measure of whether or not you made your payments on time.  If you pay your bills consistently on time, then you will be in good standing with your lenders and your payment history will increase your credit score.

If you choose not to pay your debts, or you cannot pay them, you will find your score quickly falling.

Your payment history is measured by the number of days you are past due on any debts. This is measures in 30-day increments, and being 30 or 60 days past due means you’re a higher risk for a lender to lend you money.

Anything past 90 days is a severe derogatory mark, and often ends up with collections agencies being called to try to collect the debts from you.

Any missed payment can stay on your record for up to seven years, so it is very important to pay your debts on time.

All borrowed money, including credit cards, have minimum payments that must be made each month in order to avoid this issue. If you can’t pay off your bill in-full, ensure that you pay the minimum payment to protect your credit score.

Typically, a credit card has a $25 minimum payment. A loan or other type of credit may need to be negotiated, so it is best to discuss your minimum payment with your lender.

Bottom Line:  Pay at least the minimum payment on all your debts each month in order to protect your payment history. Unpaid balances can stay on your credit for seven years.

Credit Utilization

Credit utilization is the second largest part of your score, totaling 30% of your score. Credit utilization refers to how much of your overall credit pool you are using at once.

This refers mostly to lines of credit through credit cards, and not loans.

For instance, if you have a total of $5,000 in credit limits between one or more credit cards, then $5,000 is your total credit pool.

If you are using $1,000 of that credit at once, as in you have spent $1,000 on the credit cards and have yet to pay them off, then you are using $1,000 of your available $5,000 of credit.

This means you’re using 20% of your credit, or your credit utilization is 20%.

The general recommendation is to never utilize more than 50% of your credit pool, and preferably utilize less than 20% of your pool. These same guidelines apply to any one card as well.

You should not utilize more than 50% of your credit limit on any given card, and you should preferably utilize less than 20% of your credit limit. Both factors are considered in this measurement and are measure on a sliding scale of “poor” to “excellent”.

The easiest way to improve your credit score is to simply use your credit very sparingly. This is certainly the least tempting way to improve your credit utilization.

Another way, however, is to open more lines of credit to improve your overall utilization. This should only be done if you intend to use your credit responsibly and not as a fix for poor usage.

Bottom Line:  Only utilize 20% or less of your total credit pool or individual credit line at any one time. Your credit pool is measured by the credit limits on all of your cards combined.

Credit Utilization Graph
What’s your credit utilization? Try to keep it below 20%.

Account History

Account history is a measure of the age of all your credit and accounts for 15% of your credit score. The longer you have had credit history, the better your score.

Account history is typically seen as an “average age”, rather than a total age. This is the average of the age of all your open credit accounts.

Since your account history score is based off of how long you’ve been utilizing credit, it is recommended that you build your credit at a young age.

If you are 18 years old and recently opened your first line of credit, then your average credit age and total age are both zero.

As you get older, so does your credit. At the age of 23, if you never opened up another line of credit, your age and average age would be five.

However, if you opened up a new account 30 months after you opened your original account, your average age now goes down to 2.5 years rather than five.

The reason it is better to start young is that you begin growing your credit age with accounts so that it becomes stronger as you get older.

If you opened one new account each quarter for two years, you would have a total of eight accounts. After three years, your average credit age would be 1.8 years.

While this is low, each new account you open would affect your score less and less. After a fourth year, your average credit age would be 2.8 years.

If you added a new account at the end of that fourth year, it would only go down to 2.5 years.

If you had only opened one account, and then opened one four years later, your average age would drop from four to two years.

By starting early and having more accounts, you can protect your average age of accounts. The best average account ages are over nine years.

Bottom Line:  A higher average age offers you a higher credit score. Having too few accounts can hurt your credit score by making this category more volatile.

Types of Credit

The types of credit measure both the different types of credit you have, whether it be loans or credit card, as well as the total number of accounts you have open. The types of credit account for 10% of your score.

The three different types of credit are:

  • Revolving
  • Installment
  • Open

A revolving account is what a typical credit card is considered. You are given a credit line that you can use to purchase things. You must pay off your balance each month or extend your debt by paying interest.

An installment account is a fixed-payment debt. These include student and other types of loans, including car loans and mortgages.

On these, you borrow a set amount and pay it back in fixed payments until it is paid off.

The third type, open credit accounts, are somewhat of a combination. You have an open line of credit, but whatever amount you use must be paid off in full each month.

Open accounts are used by some credit card companies over revolving accounts.

In general, having each of the different types of credit is a positive indicator for your credit score when used responsibly, and when you pay off your balance each month.

This is why it’s important to have a variety of credit on your credit history. The more types of accounts you prove you can handle, the higher your credit score.

Of course, this doesn’t mean to simply get these accounts for the sake of improving your score, but if you can strategically plan out utilizing these types of accounts then you will definitely improve your credit score.

The other piece to this measurement is the total number of accounts open.

While it may seem like having more open accounts is a bad thing, it actually is looked upon favorably.

From the lender’s standpoint, if you have a high number of accounts and no derogatory marks or misuse, then you are probably responsible enough to be issued more credit.

In fact, some sources say that having over 22 total accounts, whether open or closed, is a measure of excellent credit. However, there is no clear answer and professional opinions differ.

You can also see that this works in conjunction with credit history; the more accounts you have that are older, the better your overall credit will be.

Bottom Line:  Having all three types of credit in your credit history, as well as having many accounts in good standing, is a positive marker for your credit score.

Credit Inquiries

The last main category that affects your credit score are credit inquiries, or requests for credit. Credit inquiries account for 10% of your credit score.

Whenever you apply for a new loan or credit card, even if your offer was pre-approved, you are making a credit inquiry.

Each inquiry knocks a few points off your credit score, and also stays on your credit report for two years.

In general, having more than four inquiries to your credit at any one time can be seen as a negative, so request new credit strategically.

However, because it is only 10% of your score, you can afford to take hits to your credit history in order to open new accounts and build credit history, types of credit, and credit utilization.

As always, this assumes you are using your credit responsibly.

Bottom Line:  Requesting new credit lines itself can lower your score for up to two years. This is another reason it is important to start young. Pre-approved offers do affect your credit score.

Derogatory Marks and Disputing Your Credit Report

If you do end up getting a derogatory mark, or find something negative on your report that does not appear to be yours, it is important to know how to handle it.

As mentioned earlier, missing a payment can stay on your credit report for up to 7 years.

Requests for credit can stay on your report for up to 2 years.

Other derogatory marks, which can stay on your report for 10-15 years, include:

  • Bankruptcy
  • Foreclosure
  • Collections
  • Tax Liens
  • Civil Judgments

If you have an issue with something on your credit report, then you must dispute it with each of the agencies reporting the issue.

To do so, you must contact them in writing regarding what you believe is inaccurate on your credit report. The US Government provides some example letters that you can use when disputing a credit issue.

These negative marks could be your own, or could be the result of identity theft or other errors such as common names.

Bottom Line:  Derogatory marks on your credit score include missing payments, requests for credit, bankruptcy and other large infractions. These can stay on your credit score from 2-15+ years depending on the infraction.

Bad Marks
If you have bad marks on your credit report, your credit score will be lower and it will be harder to obtain the credit you need. Make sure to review your finances regularly!

Part 5: Details of Common Credit Building Strategies

If you want to start building credit now, there are a few things you can do as a student to do so. These include opening a line of credit, opening a loan, and in some cases, having typical household bills.

Before opening any credit cards or loans, it is highly recommended you take the time to get your finances together and make sure you can afford the amount you’re intending to borrow.

In fact, the very first recommended step is to take a look at your current credit score, if you have one, and begin tracking it so that you can see how your activity affects your credit over time.

The easiest way to get access to your free score without having to open a credit card is by using the website Mint.com.

By putting in your account information, you can not only get your free credit score every few months but also track all your personal accounts in one place.

Otherwise, you can purchase your score from one of the three agencies or search for other ways to obtain your free score.

Building Credit with Credit Cards

There are two main types of credit cards that you should worry about: secured and unsecured cards.

A secured card is a credit card with typically a very small credit limit. It is tied, or secured, to a bank account with a balance in it that backs up your credit. Its purpose is to help you build, or rebuild, your credit.

It is tied to one of your bank accounts in the event you use it irresponsibly; in that case, the lender has the money it lent you and can get its investment back.

An unsecured card is a normal credit card, and is not tied to any specific account. While it may or may not have an annual fee, it usually offers you benefits in exchange for this fee.

You should try to obtain an unsecured credit card before a secured one; if you are approved for an unsecured card, you won’t have to pay the fees and high interest rates of a secured card.

When applying for cards, you will simply need to submit an application with your personal information such as address, phone number, email, occupation, and social security number.

Applications typically take no more than a few minutes to complete and are used to check your credit and tie it to your personal records.

It is important to note that the application is just that: an application. You can be denied for the credit card if the company does not like your credit.

When opening cards of any type, you should open ones without an annual fee whenever possible. This allows you to build credit without having to pay for it.

But the other reason is that once you open an account, you should leave it open in order to continue to build your credit pool and age.

You don’t have to use your cards once opened, and can in fact set them aside or cut them up. However, if you’re paying an annual fee, the benefits of building your credit may not be worth paying high annual fees.

Bottom Line:  Applying for a credit card takes only a few minutes, but does not guarantee you’ll get the card. You can either start with an unsecured credit card, which is preferred, or a secured card. This depends on your credit, and you should try to find no annual fee cards.

Multiple Credit Cards
Starting with a secured credit card may be necessary for many students. However, you should proceed to unsecured cards as soon as possible to save on annual fees!

Obtaining Unsecured Cards

To obtain an unsecured credit card, you either can reply to targeted offers you may receive in the mail or find offers online. Pre-approved offers often give you good deals.

You can also check with your bank to see if they have a credit card you can apply for, whether in person or online. Your bank may be more likely to approve you since you already bank with them.

Each of the major credit issuers will have cards that you can apply for, and even help you find offers that may work for you.

It is important to understand the difference between a bank and a processor. Credit processors include Visa, MasterCard, Discover, and American Express.

Any bank can offer cards from any of these processors, and Discover and American Express are also their own banks.

The major credit card issuers are also major banks, and in the case of Discover and American Express, also processors. These banks just happen to focus more on their credit cards versus their banking.

The major issuers of credit cards are the following:

  • Chase Bank
  • Citibank
  • Discover
  • American Express
  • Capital One

These issuers have tools that will show you which of their credit cards will be good for you. Many of these banks have cards especially for students.

Another way to find credit cards you could apply for is to use a tool called Card Match. This tool searches all credit card sites for cards that you are pre-approved for and lists all the offers in one place.

You can also open unsecured credit card at retail stores. Most large retail stores have their own credit cards that you can apply for and are more easily obtained than major issuer cards.

If you utilize these responsibly, you can build up your credit and apply for a major credit card once your credit is established. Some popular retail stores with credit cards:

Many more stores offer their own credit cards, so visit your favorite retailer to find out if they have a card you can open to build your credit.

Bottom Line:  One option for an unsecured card is from your bank or major credit card companies; look for pre-approved offers. Another option, which may prove more accessible, are credit cards from your favorite retail store.

Obtaining Secured Cards

To find a secured credit card, you can use the same approach as an unsecured card but filtering for secured cards. You may or may not find targeted offers, but you can find them at most major banks, including:

See your bank, a local bank, or try looking at Bank Rate’s secured cards list, because there is a wide variety of issuers and options. Look for cards with no annual fees and minimum interest.

If you find an offer that does not seem good, you don’t have to accept it. Decline the offer and shop around since there are plenty available options.

As soon as your credit is good enough to open an unsecured card, you should do so and close your secured card account. Your issuer may let you know when this option is available, but you can also check your own credit score to see.

Unsecured credit cards are typically available once your credit reaches the 500’s, with the best offers available to those in the 600’s and above.

The period of time you have a secured card may vary anywhere from a few months to a few years, and your issuer may offer you the unsecured upgrade to your card once you are eligible.

Bottom Line:  Secured credit cards can be obtained from a wide variety of lenders, including your bank and major credit card companies. Shop around to find good offers; you may be able to find no annual fee cards or some with lower interest rates.

Other Credit Card Tips

You don’t always have to open your own credit card in order to start building credit with one.

You can ask your parents or other family members to add you as an additional authorized user on one of their existing cards so that you can start building credit.

This is a great way to start building credit without the hassle of having to get your own card.

Hot Tip: Check out the article “Best Credit Cards for College Students and Recent Graduates” for a deeper dive into specific cards and tips. 

Building Credit Using Loans

Loans are another powerful way to build your credit. Similar to credit cards, you can build credit using a loan by getting a loan cosigned in your name with your parents or family.

However, if you do not have this option, there are a few ways you can still get a loan. It is only recommended to get a loan if you truly need to do so.

If you are opening a loan solely for the purpose of building credit, then you need to be aware of how loans work.

Loans have fixed payments and interest amounts, so you will have to pay a set amount each month. They also have set terms, which together with the amount and interest rate determine your monthly payment.

For instance, you could have a loan for $5,000 for three years at an interest rate of 6.25%. This would come to a monthly payment of $152.68 and a total of $496.48 in interest.

Obtaining Student Loans

Having student loans is pretty common for a college student. Even if someone else is paying for your tuition, you could secure a small student loan for the purpose of building credit.

You can apply for a student loan at your local bank, one of the large commercial banks, or the U.S. Government. A few major lenders are:

Obtaining Personal Loans

You can also get a small personal loan if you need some cash to pay for things for school or your own personal projects.

Similarly, you can apply for these through your local bank, a large commercial bank, as well as online lenders. Some of the major lenders are:

Some sites, such as Bank Rate, also help you search for multiple loans at once so you can ensure you are getting the best rate.

Obtaining Car Loans

You will likely purchase a car at some point in your life. A car loan is a great way to build credit in a practical way.

If you need to get a car loan, you can either get a pre-approved loan through your current bank, through another bank of your choice, or by allowing the car dealership to secure a loan for you.

Similar to personal loans, Bank Rate can help you find a multitude of car loans. Credit Unions are another great place to look for car loans.

Bottom Line:  Loans are a powerful way to improve your credit score; from student to car to personal loans. Unlike credit cards, loans have fixed payments and a set interest rate that you must pay over the length of the loan.

Building Credit Using Everyday Bills

The last strategy for building your credit is to use your everyday bills. If you can get any of the following bills put in your name, by paying them off each month, you may build your credit if your company reports it to the credit agencies.

  • Cable / Internet (i.e. Time Warner, AT&T, Comcast)
  • Cell Phones (i.e. Verizon, AT&T, Sprint)
  • Utilities (your local gas and electric companies)

When you pay your bills, you can choose to pay them with your checking account or a credit card. If you can pay with a credit card, then you are not only improving your credit by paying the bill, but also by paying your credit card bill.

However, it may not be worth paying by credit card if there is a processing fee.

Note that, again, these companies are not required to report your activity, so having a good standing account will not necessarily increase your score. But it will protect your score from having any negative marks.

If you do not pay these bills, they will be reported to the credit agencies and this will lower your score for up to seven years!

Bottom Line:  While bills may not improve your credit score, paying your bills on time can prevent you from hurting your credit score by getting negative marks on your credit score.

Part 7: Credit Don’ts

This section is dedicated to the things that you should not do in order to protect your credit. While this article has given you many ideas on how to build it, you must always do so strategically.

You must use your credit responsibly in order to build it! Irresponsible behavior, such as maxing out your credit cards and never paying them, will inevitably destroy your credit.

Do not open too many lines of credit or loans at once. You want to refrain from opening too many lines of credit because too many inquiries for credit can hurt your credit core. It also makes it very tempting to use these lines of credit.

You can open a line of credit two to four times per year safely, but always make sure to track your credit score when doing so.

Do not go above a safe level of debt. Staying at a safe level of debt is incredibly important. Never put more on credit cards than you can pay off each month. If you cannot pay your balance, make sure you go into debt with a plan and a reason.

Do not skip payments. Skipping payments will be the biggest factor in ruining your credit score. At 35% of your total score, a missed payment can have drastic implications on your credit score.

Even if you can’t pay off your full balance, make sure to pay the minimum payment on each of your lines of credit.

Do not wait too long to start building your credit. Since age accounts for 15% of your credit score, you should not wait until you are older to begin building credit. Begin as young as possible in order to build a strong credit history.

You do not have to be rich or have a strong income stream to build credit; you simply need to use credit responsibly.

Part 8: Credit Do’s

These are things that you should do in order to build your credit.

Track your credit score, accounts, and finances. Credit is all about personal finances. The better you are at managing your personal finances, the better your credit will be.

Track your score monthly, get your free annual credit reports, and budget your money so that you always know what you are spending. The better your finances, the better your credit, and the better your future financial life will be.

Start building credit early. The earlier you begin building credit, the earlier you begin having credit. If possible, have your parents or family open credit cards or accounts in your name.

If you don’t have that option, open accounts as soon as possible to start building credit.

Pay your bills on time. Bills and utilities are not necessarily reported on your credit report, but they can be. However, if you are not paying on time, this will inevitably lower your score and be reported.

Get loans in your name. Even if you aren’t paying for your college or car, try to get your parents or family to cosign your loans with you so that your name is on the loan, and will thus begin building credit.

Open credit cards and use them responsibly. Having a credit card is one of the easiest ways to begin building credit because if you open a card without an annual fee, then you can simply use it to pay for things you would already pay for at no extra cost.

There are secured and unsecured cards; try to get unsecured credit whenever you can. These cards tend to be less expensive and offer better interest rates.

Part 9: Resources to Learn More and Conclusion

This guide’s aim was to educate you on how credit works and ways you can build it right now as a student.

However, there is much more to the overall financial world. The best method to take is to be a constant learner: never stop trying to improve your knowledge of your finances.

The more you know, the better decisions you can make with regards to your future.

The following are resources where you can learn more about personal finance, building credit, credit cards, and more.


The following contain resources from places to obtain free credit reports to providing sample dispute letters to send to the credit agencies.

Here are the major banks that you could use to secure personal loans or provide you with lines of credit. You can also see your local bank.

  • American Express
  • Bank of America
  • Capital One
  • Chase Bank
  • Citibank
  • Discover Bank
  • US Bank
  • Wells Fargo

Bonus Part 10: Benefits of Having Good Credit

Having good credit helps you get better interest rates on any loans or credit as well as helps you save money over your lifetime.

By having a good score, you have access to more offers, specifically travel benefits, on many unsecured credit cards. On Upgraded Points, we talk specifically about one group of these: travel benefits.

Certain credit cards give you the opportunity to earn points in loyalty programs that can be exchanged for travel at incredibly cheap rates.

Recommended Reading: Travel Benefit Resources

The following are some recommended resources to learn more about using credit cards for points and loyalty programs to earn travel rewards.

Recommended Cards to Build Credit

The following are some recommended cards to help you build credit. None of these have an annual fee, which means they will cost you nothing to have. If used responsibly, they are great assets to help you begin building credit.

Some have free FICO credit scores for being a cardmember, which is incredibly useful if you’re just starting out.

Some of these also help you begin earning points, which you can use along with some of the cards in the next section! Other cards simply earn cash-back, which can be used to offset some of your statement balance like a permanent coupon.

*Earns points that can be used for travel.

Recommended Credit Cards for Travel Benefits

Here are some recommended credit cards that can be used to earn and redeem great rewards. As we discussed throughout the article, using these cards needs to be done very responsibly.

Responsible use not only protects your credit, which is most important, also protects the investment you are making.

Any interest and fees that you pay due to a balance on any of the cards essentially wipes out any benefits you get! So, using these cards just for the benefits is not worth it if you can’t pay them off.

The below links will take you to detailed reviews covering how to use each card to earn travel benefits. Make sure you read the Card Math section to see whether getting the cards will be economical for you!

Some cards have annual fees which can make it difficult to get enough value out of at lower spending rates. Try starting with lower or no annual fee cards.

For student entrepreneurs:

Final Thoughts

Enjoy your travel benefits if you decide to go this route! Hopefully, they can help you get home to see your family more often or take some life-changing trips around the world.

Frequently asked questions

What does building credit do?

Building credit allows you to more easily secure loans and credit needed to take on the financial burdens of every day life. These include loans and credit cards.

Additionally, the higher your credit, the lower your interest rates will be and the easier it will be to secure jobs and housing.

How does credit building work? How are credit score calculated?

Credit is built, or rather tracked, anytime you take on major financial responsibilities from borrowing money or being extended a line of credit.

If used responsibly, your credit will improve. Your credit is tracked by a credit score, and scores are typically updated every month.

How do I start building credit?

To start building credit, you can secure any type of loan or open a credit card. When used responsibly and paid off each month, you will send positive signals to the credit bureaus and your score and report will improve.

Who are the three credit bureaus? Why are credit score different between agencies?

The three credit bureaus are Experian, TransUnion, and Equifax. While another company, FICO, was the first to develop a credit score, each bureau has now created and adopted their own scores as well.

Each score may say something a little differently about you, and multiple scores are often used in order to make decisions on whether or not to approve you for credit or loans.

What are credit building credit cards?

Credit building credit cards are simply any card that is used with the purpose of building your credit. Specific cards, called secured credit cards, are often referred to as this because their main purpose is to rebuild your credit.

However, any card can serve the purpose of building your credit if used properly. The better your credit, the more likely you are to be approved for a typical, unsecured credit card.

What are credit building loans?

A credit building loan is one that is used to build your credit, however any loan may be build your credit if you borrow the money responsibly and pay it back each month.

Are the terms "credit score" and "FICO score" the same?

“FICO score” refers to the specific credit score developed by the Fair Isaac Corporation. “Credit score” is a generic term that refers to any score that tracks your credit history. There are more than five different credit scores.

What credit score is considered poor, fair, good, and excellent?

With regards to the FICO credit score (the most popular used score, which ranges from 300-850), the following are the typical ranges of credit: Poor credit (300-629), Fair credit (630-689), Good credit (690-719), Excellent credit (720+).

What credit score is needed for a credit card?

You can get a credit card at a wide range of credit scores, however the better your credit, the better the chance you have at being approved for the card. The lower your credit, the less chance you have, and the higher your interest rates will be.

Typically, credit below 600 (considered “poor”) would be the range that requires you to get a secured credit card.

Also, each request is unique and individual, so you may be approved for credit while someone else with the same score is not.

What credit score is needed for a personal loan?

Like credit cards, you can be approved for a loan at a wide range of scores. The approval will depend on your credit history and the type of lender and loan.

The lower your score, the higher your interest rates will typically be, and the larger chance you will have of not being approved. The higher your score, the better your interest and approval rates.

What credit score is needed to buy a house?

You can be approved for a mortgage at a wide range of scores. A mortgage is just a specific type of loan.

The higher your credit score, the better your chances of being approved and the lower your interest rates.

When will my credit score update?

Your credit score is updated at least once a month.

Where can I get a free credit score?

You can get a free credit score through a number of online websites, such as Mint.com. You can also get free scores through most major credit cards, including Citi, American Express, Discover, Capital One, and Chase.

Where can I get a free credit report?

You are entitled to one free credit report each year, and you can get them from a number of online places. The easiest site is AnnualCreditReport.com, which is run by the credit bureaus.

How do I fix my credit report?

If you find something on your credit report that should not be there, you need to contact the credit bureaus immediately. You must contact them in writing. There are a number of online resources to help you draft your letters.

Brian Graham

About Brian Graham

Brian's first ever airplane ride was in a private turbo-prop jet. He was merely an intern boy trying to make a good impression, but it turns out the plane made an impression on him. It wasn't until Brian relocated to Dallas, TX, and moved in with an American Airlines employee that he truly discovered how incredible travel could be.

Travel prices are about to surge from pent-up demand.

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