PFCollege: Establishing Credit

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Personal Finance for College Students Series SealEvery fall, outside of Doherty Hall on the campus of Carnegie Mellon, sat a guy with a table, a photocopier, hundreds (if not thousands) of credit card applications, and hundreds (if not thousands) of stupid college t-shirts. Invariably he’d be surrounded by freshly minted freshmen who want a cool free t-shirt and didn’t care about giving out very personal information and copies of their driver’s license. I was one of them.

Looking back, I was lucky in that it wasn’t a identity theft fishing scam (gee, all my personal information on a credit card application, what was I thinking!?) because not only did I get a free t-shirt but I also was able to start one of the most valuable things in one’s personal finance arsenal: a credit history. This leads me to Tenet #1 of the Personal Finance for College Student series… Establish a strong credit history as early as you possibly can.

Tenet #1: Establish a credit history as early as you can, keep it blemish free at all (legal) costs.

Why a strong credit history, which will drive a high credit score, is important is fairly simple to understand. If you have a good history of paying off your debt, you aren’t late, you haven’t defaulted, a creditor will be more likely to loan you money. A perfect scenario for a creditor is someone who both pays on time and pays lots of interest – you will want to just fit the bill on the first count, paying on time (wait until you buy a house to be perfect in this case).

Real Life Example: If you want to buy a new Scion tC for $17,740 (base), it will cost you $358 per month for 60 months if you have good credit (FICO score of 650-649). If you have excellent credit, that price drops down to $348. If you have no credit, it will cost you $432 per month. If you have no credit, the same Scion tC will cost you $25,920 instead of $20,880 (excellent), or nearly 25% more – just because of your credit! Five thousand dollars is a very very nice vacation.

Let’s break down Tenet #1…
Establish a credit history as early as you can…

But it’s hard to get a credit card with no credit history, I keep getting rejected! – That’s correct, especially if you’re a college student with no income. So, when you apply for a new credit card (I recommend the mtvU credit card, it’s geared towards students), put that you’re a student and put your tuition payments as your income (I’ve did this but I don’t know what the legal ramifications, if any, there are on doing this) and you may be approved. If not, ask your parents to put you as a cosigner on a credit card (but never use that credit card!). Eventually, after a few months of being a cosigner, try applying for another card again.

…keep it blemish free at all (legal) costs.

What does blemish free mean? – It means you should pay off your debt every payment cycle and always pay on time. If you don’t think you should do this, take your credit card and send it home. Don’t use it. If you can’t pay off your statement balance every single month, don’t use the card. You do not want to leave college with any credit card debt whatsoever. Period. You will have plenty of time to enjoy the fruits of your labor after you start working (when you’ll have more money anyway and way bigger fruit!), so now is the time to set yourself up for success later.

It helps me to think of your credit as a glass ball (this is an analogy commonly used for a lot of things, like a reputation). If you take great care of your credit, it will look beautiful and it can help you out. If you drop it, it’ll break or crack and the glass ball will be very very difficult to repair and will almost never look as good as it once did.

This article is part of a new series I’ve started called Personal Finance for College Students (hence, PF College).

{ 6 comments, please add your thoughts now! }

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6 Responses to “PFCollege: Establishing Credit”

  1. wanzman says:

    This is good advice. Credit can be very important down the road when it comes to getting to where you want to be.

    I am currently a college senior and I will be graduating in May of 2007. It is sometimes rather difficult to get a credit card when you have no credit history. I have worked in banks the past two summers so I used those relationships to get past my lack of credit history. My first card had a credit limit of 500 bucks, but it did help me establish good credit.

    How good, well keep this in mind: my only income at this point in my life is what I make in the summer (about $5,000 this summer). Here is a list of credit I currently have, all because I payed of my balances each month on time with that original card:

    MBNA AM/EX Card: Credit Line $3500 (Got this card for being a member of Golden Key Internation Honor Society, I guess they figure if I am smart, I will make money in the future, enabling me to pay it off)

    Lowe’s Card: Credit Line 750 (Got this so I can charge items for improvements to the house in which I am living. My parents own the house as an investment, and they pay for the stuff I buy to improve the place like new tile etc.) I just have to provide free labor….what a deal for my parents.

    Volkwagen Credit: Credit Line $5910 (This is the amount I financed when I bought a used Jetta this past summer. I had a Ford Explorer and gas was killing me)

    So you can see my total available credit is $10,160. This is not a great amount by any means, but considering it is about double what I currently haul in per year as a student, I sometimes wonder how smart those creditors really are.


  2. Jason says:

    Great advice. Because of how much your credit score is affected by age its very important to start as soon as possible as long you can use it responsibly. I am really glad that I got a card over 4 years for emergencies. I just wish I had got it a few years earlier.

  3. Eryka says:

    I had credit cards with no problems. I never carried a balance. I used them more as a convienence after my first and only bounced check. I found it simpler to just pay one bill at the end of the month. The problem is combining a credit card with no self discipline.

    If I had to come up with my five tips for college students. 1. Finish as quickly as possible ( opportunity and actual costs) 2. Work, get some freaking experience, and put a chunck for the rainy day that will come 3. If you are going to grad school, seriously consider taking off a couple of years. My one regret is that I didn’t take a couple of years off before goign to law school. 4. Student loans are not free money. So don’t use your disbursement check to get a new stereo. I promise you, you will kick yourself in five years. (I’m still bitter) 5. Have fun. Take some risks.( Don’t do anything felonious or fatal) and you’re set. I have to add 6. Life sometimes does not go according to plan. When you are young you always see the best case scenario, and that is good. part of being young is being ignorant, it is blissful. We can’t all act 40 years old, but just stop every once in a while and ask “what’s the worst that can happen?”

  4. Carnival of Personal Finance

    Welcome to this week’s edition of the Carnival of Personal Finance. I’m sticking with my usual method of hosting a carnival — listing a summary of each piece with the author’s reason for submitting the post to the carnival (for

  5. sophomore says:

    I’m a college sophomore, and a month after I turned 18, applied for credit cards like crazy. The only one that accepted me was MBNA’s Who’s who among high school students. They gave me an initial credit line of 500 and increased it to 1500 after about a year. I also signed up for a stupid Chase card 6 months ago that gave me 400 in credit. Stinky eh?I recently got approved for a AMEX preferred rewards Green Card. I am really trying to gauge where I am in credit worthiness, because I really can’t tell. I still get offers from Aspire and those desperate cards with 150 annual fees. I have a credit score of 710, but at 19, am I qualified for bigger purchases? SHould I rejoice in gettting approved for an AMEX card? My total line of credit before the AMEX was $2000. That sounds sad. Are there cards you recommend for students that already have cards? Are there cards we should aim for? And what do you feel about pre-approved cards, and applying for those that don’t pre-approve? Sorry, first time blogger, as you can see. I’m really excited to find your page. =)

  6. senior says:

    Another thing to think about with building a credit history early: it is easier to get other loans without a cosigner. I did not know if I would be able to get a cosigner. I planned ahead where I had enough credit history with my credit cards to where I did not have to have a cosigner to get the rest of my student loans my junior and senior years.

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