Look, I'm not saying the system is necessary failing young consumers, but for $40k a year you would hope at least one of your professors would address this topic, no matter your major. Alas, we're here to help.
I know it's the summer, but for college students interested in leaning a little bit about their credit scores, here's a (Free!) lesson on 3 things students should know about credit...
1.) No credit isn't good credit
A misconception that many young people have regarding credit is that having no credit is the same as having good credit, as if each consumer starts with a perfect score and every time they open a credit card or make a purchase knocks that score down a bit.
This is NOT the case.
Having no credit is, frankly, no good at all. No credit history means you're highly unlikely to get approved for loans you may want or even need later on, including auto loans, personal loans, business loans and mortgage loans. And while this may not seem like a big deal in your college years, it could have big (and expensive) consequences later on.
That's why this next tip you should know about credit is an important one to consider...
2.) It can be easier to build credit in your college years
This is still true, despite the fact that the Credit CARD Act of 2009 set forth requirements for what a consumer under 21 years of age needed to get approved for a credit card. As required by the law, students 21 and under must either show sufficient proof of income, or provide a co-signer to get approved for a credit card.
“Sufficient income” means different things to different credit card issuers, but what it's basically saying is that you need to show creditors that you can pay your credit card bill each month. Basically, you need a job.
So why is it still easier to get build credit in college? First, the credit card offers are pretty good in college. Credit cards like Discover it® for Students and the Citi® Dividend® Card for College Students offer cash back on all purchases, no annual fee and low ongoing interest rates. The modest amount of credit required for approval of these cards makes them that much more worthwhile for students to consider, and are a lot better than the cards they're likely to get approved of after graduation and can no longer use that valuable “student” label.
Essentially, the longer you wait to build credit, the worse the credit card offers become. Start early, get your foot in the door with an excellent issuer, and begin building your credit score in college.
3.) Revolving credit can improve your credit quicker
Many college students have student loans, which means they do have a credit history up and running. Students loans are considered installment loans (or closed-end credit) since there's an end date for these types of loans and a set monthly payment to make; the same can be said for auto loans. These lines of credit do in fact build credit, but not as much as credit lines that are considered “revolving credit” - aka credit cards.
Revolving credit (or open-end credit) have no end dates and no set monthly payments. This is the type of credit issuers like to see, since it shows how well a consumer is able to use credit and (ultimately) the odds that you'll be willing to carry a balance.
Installment loans outline exactly what you're required to pay each month, giving creditors a sense of your monthly loan obligation. These payments are often higher than those required be revolving credit lines like credit cards, They also don't improve your overall credit utilization ratio – which is the amount you owe relative to the amount of credit in your name – since that line of credit is essentially spoken for in the form of a student loan, a car, etc.
The long and short of it is that using a credit card can help students to advance their credit score quicker. According to the makers of the most widely-used model of credit score in America, FICO, a consumer's payment history and amounts owed collectively make up 65 percent of their total score. Making payments on time each month and keeping a low balance on your credit card relative to your total available credit are the easiest ways to build credit, no matter your age.
It might not seem like a worthwhile undertaking now, but it only gets harder to build credit the longer you wait. Plus, if you only plan on holding on to that summer job through, well, the summer, now is as good a time as any to apply for a student credit card.
Apply for a card, use it sparingly, and pay it off each month on time and in full to build credit. That's as simple a lesson you're likely to earn in four years of college. (So how come no one seems to bring it up? … )