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PFCollege: Establishing Credit

Every 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 [3], 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 [4] (hence, PF College).