Ask HN: How can a college student build credit? | Hacker News Reader

Ask HN: How can a college student build credit?

11 pointsjliechti148 comments

I am nearing graduation (in the US) and am looking for ways to build up my credit. What advice or tactics have HNers used?

One technique I have heard is to open a CD and take out a secured loan against it. You should only lose a fractional amount of money but it should boost your score.

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If you don't have a credit card in your name yet, get one. Since you are still a student, you're probably eligible for a student credit card, which most of the major card issuers offer and (I think) is generally easier to get with limited credit history. If you can't get that, talk to someone at your credit union or bank about opening a secured or co-signed (by a willing parent or guardian with good credit history) card to get you started. Make sure you get a card without an annual fee. Even if you eventually no longer use your "starter" credit card, keep the account open and stick it in a drawer. Accounts that have been open longest are good for your credit history (and this is why you should, at least, start with a no-fee card).

As others have said, on-time payments and length of history are mostly key. As you build credit, get another card or two with higher credit limits. Call your cards' customer support lines every year or so and ask for a higher limit. Having a high limit (assuming you will not abuse it and rack up debt you can't pay) is good in itself, but mostly I'm suggesting this since the fraction of your credit that you actively use factors into your credit score, and a low fraction is better.

As someone else mentioned, diverse sources of credit are good for your history too. Assuming you're not looking to buy a house soon, an auto loan is probably the only other type you'd get. Even if you can buy a car in cash, think about financing through your credit union. If you can get a loan with a lower APR than what you might conservatively get with that cash sitting in an investment account (4-5%), you'll at least break even financially and the credit history may be worth it when you're looking at mortgages.

I strongly recommend Dave Ramsey's approach to credit scores. Credit scores are a measure of much much debt you can carry. If you carry a load of debt and pay it off, your score goes up so people can lend you more debt. That's the wrong question. The proper question is how can you remain out of debt and build your wealth? You don't need a credit score for that. As a 30something looking back at 10 years of debt, I totally regret it. Carrying debt is heavy on the soul and limits your options. Debt free living really is liberating.

http://www.daveramsey.com/article/the-truth-about-your-credi... http://www.daveramsey.com/new/baby-steps/

Yeah, you shouldn't need credit for anything but a house(or if you're in a REALLY tight situation and need to finance a cheap used car to avoid endangering your livelihood).

People like to trash on Dave because he's religious(and very vocal about it) but I view it like AA/NA/etc(i.e. whether or not you believe the religious part seems to be unrelated to the positive effects of "working the program").

I think he's great.

Dave Ramsey's sledge hammer method is geared for those tending toward the innumerate end of math skills and the low end of self-control. They are simple, unqualified “baby steps” and rules that don't require one to understand any nuance to personal finance. They are not an optimum and don't really pretend to be. There are several rules he offers as non-negotiable that, for those who have even marginally above average money skills and self-discipline, end up costing their practitioners more money in the long run. It's a good program for those who suddenly find themselves buried in debt and don't understand how they got there; it's less suited for those who are already doing well or have a clean slate.

So, having worked with Ramsey trainers and Ramsey disciples, and having worked (in a very cursory manner) with the program myself, most of what he teaches falls into three categories: 1. I lack self-control or 2. I lack basic math skills.

I've also noticed that without Dave, those that strictly adhere to his program have an incredibly difficult time making money and budget decisions on their own.

A credit score can save you money in the long run. Very few people can pay cash for a vehicle or a home. Better credit scores allow you to reduce these payments and interest in small fashions.

Also, while a credit score is a measure of how well you handle debt, why not get a good one? Charge gas, groceries and regular incidentals, pay it off every month. Get a card with cash-back, and earn free money for spending you would already be doing.

Credit isn't a devil out to destroy your life. Like anything else, it's a tool to be used appropriately.

First, get your name on as many bills as you can (utilities, cell phone, cable, etc).

Get a credit card that you actively use but pay off every month (rolling over debt will not hurt your credit score as long as payments are on time, but as a personal bit of advice, pay it off every month as to avoid a ridiculously slippery slope).

Once your score is somewhere in the 650+ range, and if you're considering a car, financing some of it isn't the worst way to build credit.

Lastly... time. Unfortunately, it just takes a long time to build an excellent credit rating. One ding you'll likely see on every report you pull will be something saying you haven't had credit very long. After about the five year mark, this starts to disappear.

Once again... caps for emphasis - PAY EVERYTHING ON TIME. A year of great payment history can be erased by a few late/missing payments. Keep good track of when bills are due and set up auto-payment if possible to ensure payment. But also watch those accounts like a hawk as even auto-pay is not a guarantee.

> Once again... caps for emphasis - PAY EVERYTHING ON TIME. A year of great payment history can be erased by a few late/missing payments. Keep good track of when bills are due and set up auto-payment if possible to ensure payment. But also watch those accounts like a hawk as even auto-pay is not a guarantee.

Counterpoint. I have ~13 years of solid/good credit history, and walked away from a severely underwater townhouse ($~100K underwater) 3 years ago. I have over three years of missed payments on that mortgage (+36 "dings"). Credit score dropped from 750s to 690, no credit lines closed by other institutions, and I'm still able to easily get financing.

Credit scores are highly overrated.

Pro Tip: Being an authorized user on someone else's card who makes all of their payments on time will positively affect your credit history.

This was originally not going to be the case, but was changed at the last minute when the Federal Reserve mentioned Regulation B to Fair Issac:

http://www.bankrate.com/finance/credit-debt/fico-08-will-sco...

> I have ~13 years of solid/good credit history, and walked away from a severely underwater townhouse ($~100K underwater) 3 years ago.

Credit items last either 7 or 10 years at most (I forget which). So, from the point of view of the credit bureaus, you have 7 years of solid credit history.

That probably weighs heavily in many credit scores, and if you've only missed mortgage payments but haven't missed payments on revolving credit, that may be strong enough on some credit scores to outweigh the mortgage.

Note that I said 'some credit scores' - there isn't a single credit score, even for any given institution. They all have several, and when a prospective lender pulls your credit score, you don't know which one they're going to use. They use them as secret formulae to figure out whether or not you present a risk to the specific lender, which is why a single agency can have as many as 40 different scores for the same person, depending on which the lender requests.

> That probably weighs heavily in many credit scores, and if you've only missed mortgage payments but haven't missed payments on revolving credit, that may be strong enough on some credit scores to outweigh the mortgage.

The FICO model was specifically modified in their latest revision to downplay the significance of a mortgage default if all other lines of credit were paid on time (due to the housing crisis). I don't have any proof of this other than a conversation I had with a Fair Issac employee over a beer and my own data from my credit report/score.

Having your name on bills does not affect your credit rating unless they are delinquent, which will severely negatively affect your credit.

Exactly. I had this myth drilled into my head when I was growing up, but I was disappointed to eventually discover that years of religiously paying utility bills on time had no positive impact on my credit rating. Not that there aren't other advantages to paying bills on time, but still.

Yes. I was once presented an option of paying either the Gas and Electric bill for our half of the duplex house that I was living in, or paying the rent and a share of the utilities (since nobody else would do it.) We renewed 18 month leases two or three times, with either four out of six or four out of eight tenants signing.

None of this ever appeared on any credit report. I don't think I actually believed it would improve my credit score, but when the rental company came and threatened to evict every tenant for the third time (presumably because it was a dilapidated, drafty old flophouse and nobody wanted to sign a lease renewal), everyone took the opportunity to move out and I was stuck with the entire bill for half a house, for the extra two months I needed. (I managed to split it with someone and get the hell out.)

In the cold winter months, gas heat cost more than the rent for the entire half of a house. In the summer, I could get away with paying sometimes $50 or even sometimes $0 for a month, due to past estimated bills that were over actual usage. That was nice, but it really sucks getting stuck with all the bills when everybody splits because someone convinced you it would be a good idea to put your name on as many things as possible.

Get a Credit Card, pay it off every month. Repeat.

Although I never understood American's obsession with their credit scores. Unless you're taking out a mortgage tomorrow I don't really see why it matters. Credit scores are a natural part of normal consumer activity, no need to game them.

Totally agree. We all obsess about the FICO score way too much. If you plan on living mostly debt free then usually you don't even have a need for a credit score. There are ways to get mortgages if you want one even if you don't have a credit history.

> There are ways to get mortgages if you want one even if you don't have a credit history.

I've never heard of this. Even if its possible, You will most likely pay a huge premium, if you want a lender to not use FICO scores to determine how risky of a client they're about to lend money to.

You'd think that someone who had regularly saved large chunks of their pay for years, and never got in any debt, would be a pretty safe person to give a mortgage to! Perhaps there's a gap in the market there. Or perhaps there aren't enough people like that to make it worthwhile? :)

Wow, I guess my last post was unpopular here. Look into "Manual Underwriting" its definitely possible to get a mortgage without a FICO store.

My problem withe the FICO score is that it is not an indicator of financial stability. Its entirely based off of debt. If someone wants to live debt free, which most would argue is a great position to be in financially, you're actually punished by FICO. The system is broken, and everyones obsession with the FICO score just feeds that broken system.

If more people did things like Manual Underwriting, and tried to live debt free I think it would drastically help the entire system.

I was about the age of the original poster, and had lived debt-free, credit-card-free thus far, when I went to buy a mobile phone. The listed price was $100, but because I had such a low credit score, they were going to charge me a $500 deposit fee to buy the $100 phone.

It's totally possible to live without debt, but it seems curiously inconvenient to live without a good credit score.

Just to clarify, you were almost certainly not buying a $100 phone, but a $600 phone and two year contract with only $100 upfront.

You can easily buy an unlocked phone for full price, and use it on a prepaid service with no credit check.

It's been some years, so I don't recall exactly, but this is probably correct. Nevertheless, the point remains: my inadequate credit score mucked with my options here.

Your inadequate credit score prevented you from being able to get a form of debt. Nobody is arguing thats not true.

And yes, cell phone subsidies are a form of debt because you are paying back the price of the phone built into the 2 year contract. If you buy the phone upfront then you can go month to month without needing to be tied into a contract.

So my point is consistent, if you plan on living debt free, the FICO score is being given way to much attention.

This all makes sense. Regrettably, the Verizon salesman did not explain it to me this way, and presented it as a penalty due to my low credit score. It seemed believable, too, because it wasn't that interesting of a phone. This was in circa 2002; $100 seemed like a decent price for the phone I was trying to buy -- $600 did not.

Oh well. Thanks for your comment!

Access to credit early can be a useful thing, and so getting a good score reasonably quickly can help. One of the interesting things we did was get our kids checking accounts when they were still in grade school. (its basic arithmetic to balance them so well within their capability) And this had an interesting consequence of giving them an early financial visibility to the credit markets. To be completely honest I don't know how that affected their scores but they were getting credit cards in college with real limits ($1,000 - $5,000) when their peers were not able to qualify for $500 cards.

> Unless you're taking out a mortgage tomorrow I don't really see why it matters.

Because it does? Apartments often do credit checks. Utilities run checks on you and require down payments for bills if your credit is too low. If you want a "nicer" credit card (Amex, for example), you have to have good credit. Starting a business and want a small business loan? They check your credit history if your business doesn't have a history. Etc..

Credit, at least in America, does matter. Can you get by without it? Of course. But having good credit is pretty easy to do and can have nice benefits.

The thing is, it's pretty much bound to be high as long as you don't do anything stupid. Good credit is nice, but it also takes zero effort for the most part.

That is true, but you also do have to take actions that generate that default good credit. In many cases no credit == bad credit. Hence the question OP asked.

Having a high credit score gives you an advantage that most underestimate. Whether you're competing for an apartment, a job, or anything else if you have an 800 credit score and the other person has a 550 credit score, you win.

Like everyone has said, get a credit card and pay it in full. Ideally pay it in full before your statement comes. Many starter credit cards will have a ridiculously low limit, my first discover card was $500. The issue with paying just on-time and not before the statement date is that discover reports your balance as of the day the statement prints so my reported available credit was always dismal.

I also had some American Express charge cards, they don't have a huge affect on your credit but they may help you get an American Express credit card if you have a thin file.

Once you got some credit, you can go for a car loan. I opted for a lease (since they tend to be cheaper then a new car). My current credit score tends to hover around a 720 FICO and I'm a rising junior, will probably go up a decent amount when I remember to pay my discover card in full before the statement date.

Wrong. Pay the bill after the statement is delivered and on/before the due date. Paying before the statement arrives means you receive a statement with a balance of $0. When reported to the credit bureaus, a $0 balance does nothing to help your credit score.

I don't think this works the same way for all credit cards. At least once I've had a card show that it carried more than its limit in one month on my credit report because I paid it off twice during that month. However, it hasn't happened consistently.

If you're approaching your limit, either request an increase or, as you have done, pay it off. There very well could be inconsistencies around reporting. I am still an advocate of paying the bill on the final due date because I see credit cards as a 30 day, interest-free (assuming you pay it off), micro-loan. It makes sense to let your cash accrue as much interest as possible (although not a lot these days) in your bank account before paying off the card.

I don't think it's that important to do anything crazy. If you've just had a credit card since you were 18 and paid it off every month you'll likely have a credit score that's more than good enough.

Outside of a house the only reason to carry debt is to hedge your risks on large purchase items you already have the money for (IE you have the money to buy a car, but paying for it up all front may be enough of a risk to utilize credit if it would eat up most of your savings).

The biggest factor that seems to have an effect on my credit score is account age, so I would advise against trying to do anything crazy and short term. Having a single credit card for 8 years will go farther than any crazy loan shenanigans will in 3 IMO.

Paying all your utility bills and such on time goes without saying.

What do you want to use this credit for?

I can't think of a whole lot of things that are worth taking on significant debt for a new college graduate. Certainly not real-estate unless it's actually your business because it reduces flexibility to relocate for a job. Maybe reliable transportation, but that's a problem that can also be largely solved by relocation.

Revolving type credit to purchase gas and groceries makes sense. It also makes sense to purchase supplies for one's business. Beyond that, it's just consumer debt.

Putting money into a CD as collateral for a secured loan is probably worse than a slightly lower credit score due to the illiquidity of CD's.

getting an apartment in SF?

> I can't think of a whole lot of things that are worth taking on significant debt for a new college graduate.

There are a lot of things for which a credit history is helpful or downright necessary. I would never recommend signing a mobile phone contract, but most of them do credit checks when you do 2-year contracts. Utility companies also do credit checks to determine whether you need to pay a deposit.

It depends on where you are and how competitive the rental market is, but in NYC, it strongly helps to have a credit history in order to sign a lease.

Landlords (at least for the apartments you'd want to live in) generally are reluctant to sign leases for new college graduates unless they have a guarantor on the lease (many require that the guarantor make 80x the monthly rent in income and live in the tri-state area).

Having a solid credit history not only makes them more likely to waive these requirements, but also more willing to accept an offer for lower rent (because they're more confident that you will pay rent on time and not cause damages, the two things that they care about the most).

None of this is worth "taking on significant debt", but fortunately, you don't have to take on any debt at all in order to build a credit history.

We are in agreement that there are better and worse uses of credit. We are probably neither of us about to graduate college, however. Hence my question was why the OP wanted credit.

That's the wrong way to think about it. Credit isn't something you just get when you need it. You have to build it so it's available when you want to use it, this takes time.

Through high school and college I had a credit card that started out with a $150 limit and grew to around $800 or so. I used it for books and other small stuff. By the time I bought my first home at 21 my credit score was in the mid-high 700's. By the time I was in my mid-20's it was around 800.

I'd have had a harder time and higher rates if I hadn't established my credit early.

Get a credit card, use it a tiny bit each month, and ALWAYS pay it off each month. Just having a card and not using it won't help much, but using it too much (i.e. holding a balance) will also not help. Realize though that you will always be dinged for having a 'short' credit history in credit reports. It wasn't until I was almost in my 30's and had a card for over 10 years that I stopped getting dinged for 'short' credit history. Now that I've had a couple car loans, have a good history on a mortgage, and always pay off my revolving credit my credit score is pretty darn good. It will just take a long time to get there unfortunately.

No one has yet mentioned a secured credit card. They are fantastic and you never have to worry about putting too much on the card since you can liquidate it at any time. Great way to start.

I highly recommend skipping anything co-signed. It is a personal choice, but that puts you in a position of indebtedness just when you are starting out on your own. You don't want to owe for something before you even get started.

I bought a CD for $1000, and secured a credit card with that through the same bank. It worked out better than a 'secured' credit card because I made some interest.

CD Rates are different now, but it still works out better than secured.

I had to do it secured because I had a $78 water bill that a roommate forgot to pay on my credit from 3 years earlier.

Which reminds me of something else, try to get past paid off debts removed if that is hurting you. Sometimes they will do it, depending on your story.

Apply to a credit card with your bank. Without credit they are usually easy to get accepted to.

Use your card for your normal purchases, don't just buy big things for the sake of purchasing things. Pay off your bill ON TIME every time.

What I like to do is pay off most of the bill before it is due, and keep 5-10% of the bill for when they report it. This keeps your utilization at that low % which keeps your score up.

Another thing to do if you can get multiple cards is set up an recurring purchase on one of them like netflix and make it so it auto pays the bill monthly. This way you are keeping it active while not really spending anything.

Some banks have "secured" credit cards. They require a deposit, and issue a credit card for a credit value less than your bank deposit. This is a marketing technique for people who have bad credit, and need to re-establish credit. Use the card, pay it off immediately. Repeat.

Then in six months to a year, apply for other credit cards, perhaps with same bank, perhaps with others.

Do not take out a loan just to build credit. That's simply a great way to waste money. Just get a credit card and pay it off each month (after the statement but on/before the due date). Setup automatic payments to make this easy.

Also, check out http://www.reddit.com/r/personalfinance.

Loans are also bad because you start with a 100% full credit (e.g. $1000 outstanding on $1000 loan) and pay it down. Part of the credit rating is your balance to credit ratio, so 5% looks much better than 95%. I've heard that the ideal is <30%

For 800+ FICO scores, you'll need 3 types of debt.

1) Installment Debt - i.e. a car loan

2) Mortgage Debt - mortgage loan

3) Revolving debt - credit cards, with balance under 50% of CC limit

and of course...no late payments on any of them.

Anecdotally, this is untrue. I've had 800+ with just a credit card and an overdraft line of credit.

You can also ask around at credit unions to find one that reports to credit bureaus and take out a small loan and pay it back on time. It will cost you a bit in interest but is another avenue to building credit.

buy a car and pay off the loan

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