College students often focus on several key statistics: GPA, standardized test scores, etc. However, one thing that most of college students do not consider is building credit. Having good credit is absolutely essential for life after graduation. For example, taking out a car loan, buying a house, or even purchasing basic necessities such as cell phone plan all require a good credit score. Despite the importance credit, in reality, 25 percent of Americans have credit trouble. To avoid this outcome, starting early is the best action that you, as a college student, can take to be ready for life after graduation.
Credit allows a person to make purchases without actually spending money at that moment; but it requires the individual to compensate for the money spent at a pre-specified later date. A bank, or a credit union, usually does not want to just “make it rain” and give out free money with the belief that it will be paid back in full, in a timely manner. Due to the risk involved, banks and credit unions need to be able to understand and analyze prospective borrowers. They decide whether or not to lend based on the method of the five C’s of credit: character, capacity, capital, collateral, and conditions.
- Character – This is a qualitative measure of a potential borrower’s character and whether or not he or she leaves a positive impression on the bank or credit union.
- Capacity – This is a quantitative measure of the potential borrower’s ability to actually repay the loan by checking if the borrower has any recurring debts and comparing that to current income.
- Capital – This is the amount of money that the potential borrower already has. A large contribution would lessen the chance of a default, or failure to fulfill the obligation of paying back the loan. Banks also look at the client’s payment history to see if he or she is reliable or not.
- Collateral – In case of the borrower defaulting, the bank or credit union wants to ensure that the potential borrower has property or large assets to “secure” the loan. In essence, if the loan cannot be repaid, the bank or credit union wants at least something back.
- Conditions – This is the actual written, technical details such as the interest rate or the amount of principal.
All of these factors are being considered by the bank or credit union when they are deciding whether or not to give out a loan. Having good credit not only allows you to qualify for loans but also qualifies you for auto insurance and rental applications. It can even be considered when you apply for a job.
So how do you build good credit as a college student? Consider the following five steps and you will be on your way to building amazing credit.
- Get a credit card that is right for you – Getting a credit card will allow you to build up on the “Capacity” portion of the five C’s of credit. Having no history will mean that lenders will have no idea who you are and what type of person you are. A credit card will be the first step in establishing your role as a responsible borrower. Also, it’s important to find the right credit card at the right bank for you. If you feel that interest rates are too low, be sure to look into alternatives that schools may provide such as credit unions. Credit unions offer membership in which you, the borrower, can decide what to do with your own money, meaning better interest rates!
- Use your credit card responsibly – Be sure that once you get your card, use it very wisely. Do not carry an unpaid balance on it and do not pay any interest. You should use it for small purchases like buying a basketball and pay it off completely each month on time. Some tips that will create responsible credit card practices include not exceeding your credit limit, paying off each balance month to month completely (or you will be paying extra), and creating a good system of keeping track of your finances.
- Do not apply for several credit cards – One credit card should be enough and multiple credit cards will just make it harder for busy college students, like us, to keep track of our finances.
- Do not co-sign your friends – If your friend screws up, you screw up. Don’t do it.
- Consider joining a credit union – Having great credit is something that is necessary for obtaining things we all need, but the path to getting that credit or recovering from bad credit may seem difficult. Credit unions work to absolve that issue by polishing damaged scores with credit builder loans, giving out free credit counseling, offering a wide array of online tools, and establishing credit with secured credit cards.
Financial independence is one of the most difficult things we, as college students, have to develop. However, by building credit at a young age and using a trustworthy financial institution, you are well on your way on being financially independent.
More about LCUI:
The Lion Credit Union Initiative is a campus initiative that aims to build a credit union for Columbia University students, faculty, employees, and alumni. It has been active for about two years and currently consists of about 25 members. A credit union is very similar to a bank and can offer the same services such as checking accounts, savings accounts, mortgages, etc. However, credit unions are not-for-profit; those that deposit their money in a credit union become voting members and shareholders, and they are community-oriented! To learn more about LCUI, please visit: http://lioncredit.webflow.com/