"Good friends, good books, and a sleepy conscience: this is the ideal life."
- Mark Twain
Building credit is important for college students who want to hit the real world running. The easiest way to build credit is to apply for and use credit cards to establish a credit history that can be checked by lenders.
Unfortunately, credit cards are often misused by spendaholic students or those who simply don't understand that credit cards aren't money but a promise to pay what you owe. For many years, credit card companies took advantage of student financial ignorance and inexperience by making it easy for them to get credit cards with big credit limits, then cash in on the interest and late fee payments that resulted for many students.
This led to the federal Credit CARD Act of 2009, which requires co-signers for applicants younger than 21, and a July 2011 USA Today story found that it has cut down on student credit card abuse. At the same time, the Act makes it harder for responsible students to build their credit history.
I'm not suggesting that students go out and open a bunch of credit cards, but using some plastic responsibly can go a long way towards creating good credit. Here are some options for students to help avoid high interest rates and annual fees.
Secured credit cards are one of the easiest and safest ways for the credit-less to to get a card. They require a deposit equal to the credit limit so students can't overspend. Rates and fees vary, so shop around. The website PT Money has a list of the best credit cards for students..
Store credit cards are another way to gain entry into the credit system. They're best used for necessities such as gas, groceries, etc., and they help build a steady history of payment and fit easily within the framework of a budget. One caveat; they usually havery high interest rates so it's best to pay off the balance each month.
Opening a bank account is another way to establish credit history and, while bank account information doesn't appear on credit reports, lenders commonly request it to verify steady income. For students new to managing their own finances, Mint.com is a useful resource for tracking accounts and expenses.
Co-signers can help students get a foot in the credit history door too. Parents or other close relatives are usually the best co-signer options, and having someone with established credit co-sign a loan or credit card application leads to lower rates and a greater chance of approval while building credit for both parties.
Paying your bills on time is the best way to establish good credit. If there's a payment coming up and things are tight, don't skip it. Cancel the cable, sell your gift card from Aunt Esther or pawn unused video games and movies. Do whatever it takes (within reason and the law!) to pay your bills because even a few missed monthly payments can have a serious impact on a credit score for years.