Last year was one for the history books. Between a pandemic, an economic crash and a new President of the United States, there has not been a year like 2020 for a long time.
Still, 2021 is not quite normal. We still have a long way to go. In the meantime, however, there are still students like you trying to start their lives at an unprecedented time in world history.
Part of the beginning of your life is building a credit history, and while banks aren’t as quick and easy with money as they were in the 2010s, there are still ways that students can start building their credit in 2021.
What is credit and where does it come from?
Credit isn’t just related to a three digit number or a credit score. Instead, credit is just the ability to borrow money or use certain goods or services. The idea of a person with credit dates back to ancient times when some people were considered more creditworthy than others because of their reputation and status.
When we started modernizing and more and more people were demanding access to credit, a standard method of assessing creditworthiness was required. The first credit bureau, Atlanta-based Retail Credit Company, was the first to gather information about people made available to lenders to help them make decisions about who to lend money to.
Over time, lending opportunities emerged as the American people became more confident in the economy. Mortgage credit increased significantly with the founding of Fannie Mae in 1938 and with the help of the GI Act in 1944. The GI Act gave WWII veterans the opportunity to obtain a federal government-guaranteed mortgage.
The first credit card was introduced as a charge card in 1950, and slowly the idea of a rotating credit card became much more mainstream. The Fair Credit Reporting Act of 1970 made it illegal to collect information about race, sexuality, and disability that was used to discriminate against potential lenders. More credit bureaus took shape, including TransUnion, Equifax, and Experian (or the three big credit bureaus today).
Later, in 1989, the Fair Isaac Corporation (FICO) worked with the Big 3 credit bureaus to produce a three-digit credit score, now known as the FICO score, or credit score.
Why is it so important for students to build credit?
Credit building is important for anyone looking to borrow money to meet their financial goals. Good credit is of great benefit, and people with good credit can get lower interest rates, higher loan amounts, and access to more goods and services from lenders and card issuers.
The biggest area where good credit can help is in mortgages. If you want to own a home someday, you will likely need to take out a mortgage to buy it. A mortgage is a loan to buy land that is most commonly used by consumers to buy single family homes. To get a mortgage, you need to demonstrate solvency (which is usually based on your debt to income ratio), solvency (based on your debt to equity ratio) and creditworthiness (which they check against your credit history and) Your credit score).
As a student, you may have a significant amount of student debt. By building a good loan, you can later consolidate or refinance your student loans, which can give you lower interest rates and even lower payments. This could help you increase your savings, which can then be used towards a down payment on a home after you pay off your student debt!
How can a student build credit?
Take advantage of student credit card offers and use your card responsibly.
Credit cards are constantly being offered to students, and banks are using student credit cards and banking to attract new customers. Don’t take the first student credit card that comes up in the mail: do your research. Go to Google and find out which credit card deals offer you the best deals.
More importantly, you want to use your credit card responsibly. Responsible use of a credit card requires the following:
- Use your credit card to pay for things you can afford, not things you can’t afford.
- Do not top up more than 30% of your available balance if you can help.
- Don’t miss a single payment. Ever. It is better to make the minimum payment than to pay nothing at all.
- Pay out your balance in full every month. In this way you can avoid interest expenses.
As a student, we strongly recommend that you do not write large purchases on your credit card.
Pay off your student debt while you are in school.
Many students choose to work while in school to pay for school books, living expenses, and entertainment. A great way to start building credit early is to start making payments for your student debt while you are still studying.
You don’t have to put a lot of money into your debt at school. Just pay what you can afford. These payments will lower your overall debt burden later in life and help you build good credit even before you graduate.
Learn the habits of financial discipline early on.
Financial discipline is one of those things that is not based on laziness or morality, but based on habit. People with good financial discipline have the necessary habits to keep themselves afloat even in difficult times. It is their habits that enable them to withstand periods of reduced income.
Good financial habits include:
- Set aside money for savings every month.
- Maintain a living budget by tracking expenses versus income.
- Pay off credit cards in full every month.
- Avoid unnecessary consumer debt.
- Track credit card transactions and spending.
If you have no income, you won’t be able to pay large credit card bills or save money. Instead, keep track of your expenses and find ways to reduce them.
Learn more about good financial discipline habits!
Student loan development tips in 2021
There are still ways that students can start building their credit in 2021. Check out this new blog for more information.
Jason M. Kaplan, Esq.
The credit professionals