Building a steadfast credit history throughout your student years can lead to greater financial freedom in the years to come. A longer credit history positively impacts your credit score. So let's dive right into it: What is credit score and why is it important?
Credit score = Financial ‘Street Cred’
Imagine meeting a 4-year old for the first time. He asks you for a lollipop with a ‘pwetty pwease’ and promises to repay you with two lollipops the following day. What are the chances, right? If he didn’t have a lollipop to start with, how can you expect him to have two lollipops by tomorrow? And besides, he’s FOUR! So, being the sensible person you are, you decline his request, which leaves the kid without a lollipop.
To financial institutions and creditors, you are that 4-year old, except in your case you’re not asking for a lollipop; you are asking for a loan, lease on a car, house or apartment, or simply wanting for better interest rates. However, these institutions are sensible and because your financial history is not known to them, they won’t simply give you these things without being sure that you’ll keep your end of the bargain. Besides, you’re so young and experienced - why should they trust you? (Not so nice being on the other side of the scenario, is it?) That leaves you without your loan, car, apartment or favourable interest rates, because on paper, you don’t look trustworthy.
This is where credit score comes in. Credit bureaus (like TransUnion, Equifax and Experian) award you with a three-digit score according to your financial status and history. They take into account your current debt, past debt and repayment history, as well as other factors like the type of credit you’ve utilised, and calculate a score that represents your creditworthiness. If you have a good, established credit history, your credit score will be higher, which presents you as being responsible enough to fulfil financial obligations. In simpler terms, the higher your credit score is, the more likely you are to get the lollipop.
Building a Good Credit Score
There are several ways to build a good credit history and maintain a high credit score, but let's focus on the methods that are relevant to you as a student:
1. Apply for a secure credit card
As traditional credit cards are typically difficult to come by, you can apply for a secure credit card to which you will have to pay a cash deposit that is equal to the credit limit on your account. Because the credit limit is usually much lower than that of a traditional credit card, you are less likely to spend beyond your means and find yourself stuck in a financial dilemma. Still, you get the benefit of being able to "overspend" slightly and making repayments on time, which will help to build your credit score.
2. Use your student bank account
Most student bank accounts allow a free overdraft which, if you pay your debt back on time, will also contribute to your credit score. Although the overdraft amount is usually relatively low, it still gives you some flexibility when it comes to your finances without having to apply for a credit card. If you utilise the overdraft wisely, it will reflect on your credit score. You can contact your current bank and enquire whether your student account allows free overdrafts. If it doesn't, it is super simple to switch to an account that does.
3. Become an authorised user on someone's credit card
If applying for a credit card is not an option for you, you can still build on your credit score by being added to a family member or friend's credit card as an authorized user. In doing so, you benefit from the account holder's credit history whilst also building on your own. Of course, you will first have to ask/convince someone to add you to their credit card as an authorised account user. Usually, this would be an immediate family member or partner. If they agree, you will reap the credit score-building benefits thereof.
4. Take out a credit builder loan
A credit builder loan consists of a type of savings account that is set up for you by a lender, who deposits the loan amount you qualify for in the account. You then make monthly payments to the loan which the lender will report to the three main credit bureaus. This helps you to build a good credit history, which will reflect in your credit score. Of course, the greatest award for taking out a credit builder loan is that you will get the money as soon as all of your payments have been made.
5. Report rent/utility payments
If you are already making monthly payments towards your rent or utilities, make sure that these payments are reported to credit bureaus by your landlord or utilities provider. Whenever an on-time payment is made, this will be added to your credit history and can give your credit score a boost.
6. Pay off your student loan
It might seem obvious, but it is crucial that you repay any student loans or debt you might have (and do so on time!). If you have a student loan and can afford to, start paying it off bit-by-bit. If time allows it, get a part time job to do so. These payments will reflect well on your credit history, and make sure that you are not left with a heap of student debt once you graduate.
“Students don't need good credit scores yet...”
Yes, I thought this would come up, but you should *cue inspirational quote*:
"Plan something today that your future self will thank you for."
Although property loans and car leases might seem like issues destined for your future self, it usually becomes relevant much sooner and much quicker than you think. And when it does, you might be kicking yourself for not working on your credit history earlier in your life. So build that credit score today and thank yourself for it later.
Rebekka Venter is a South African-born Linguistics Honours grad who is passionate about connecting young talent with the employment market through her work for StudentJob UK.
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