How to Establish Credit as a Student

(Get all your student credit questions answered in the Student Credit Forum!)

Credit is a big catch-22 - you can't get credit without establishing credit, and you can't establish credit without getting credit. So how can a student establish credit?

First, review what makes up a credit rating - the FICO score. More information on FICO scoring can be found in our Credit 101 Tutorial. The basic breakdown is:

1. 35% Payment history
2. 30% Outstanding debt
3. 15% Length of your credit history
4. 10% Recent inquiries on your credit report
5. 10% Types of credit in use

Logically, then, you will want to begin working on the first and third items, while minimizing the second and fourth items. In order to establish credit, you will need to obtain a loan and establish a solid payment history while not shopping around extensively for credit.

Think of credit as essentially a secret society. Your fastest entry into this society is to have an existing member (someone who already has established credit, preferably excellent credit ) sponsor you. How? You open a line of credit with that person as a co-signer. The line of credit can be any loan - a credit card, an auto loan, a mortgage, a student loan. Virtually every form of loan can be co-signed.

What is the role of a co-signer? They essentially guarantee the loan. When you complete your application for a loan, the co-signer indicates that if you fail to pay back the loan, they will pay it back on your behalf. They guarantee that the loan will be paid - they're the backup. Obviously, this exposes the co-signer to potentially disastrous financial risk, so it's vital that the loan applicant and co-signer trust each other.

Most often, a co-signer is a parent or guardian, though any person with established, good credit can be a co-signer.

If for some reason you cannot obtain a co-signer, you need to establish credit using a secured method. A secured line of credit is essentially a debit account - you give a third party a sum of cash, and they allow you to spend it using their service.

Finally, some services, if you cannot establish credit or are refused credit, allow you to work with them regardless, such as a cell phone company or cable television provider. Instead of a credit card, they will offer a service such as automatic debiting from a checking account. Use their service and ensure that payment is made reliably, and this will help build your credit record.

Establishing Credit To Do List:

1. Select a potential loan type (i.e. credit card, student loan, car, etc.)
2. Select a co-signer if possible
• If not, select a loan type that does not require a cosigner
3. Apply for the loan
4. Make payments that are:

• Always on time or early
• Paid in full or meeting the regular minimum payment + 10%

Establish a track record of excellence for a minimum of two years prior to going after a major credit item (mortgage, etc.)