By Amalya Teitelbaum, Business Editor & Manager
Many people are given their first credit card around the time they first enter college. Many of those same people have no idea what the purpose of said credit card is. And no, it isn’t just so that you don’t have to carry around 20’s with you. The purpose of a credit card is in the name itself; to build credit. But, how one does it, is indeed the essential question.
Certain questions, however, must first be answered. The first being: what is credit? Credit is the measure of trust one party has in another party’s ability to receive some kind of resource and pay for it at a designated point in the future. Simply put, it is for those who would like to immediately obtain something, but do not wish or do not currently have the means to pay for it. It can be used to purchase a car, take out loans, pay for a property, and much more.
Question number two: who issues credit? The simple answer is the bank you are associated with, but a deeper look reveals a more complex system. A credit bureau, or a credit reporting agency, is responsible for issuing and regulating credit. More elaborately put, a credit bureau is an organization that collects and researches individual credit information and sells it to creditors for a fee so they can make decisions about granting loans. In sum, they measure your “creditworthiness” (or trustworthiness).
Question number three: what types of credit are there? There are two types: secured credit and unsecured credit. While both secured credit cards and unsecured credit cards have numerous overlapping similarities, there are a few key differences. The main difference is who the card is funded by. A secured credit card is funded by you; you place the money in the account and you decide the limit. An unsecured credit card is not funded by you. Your credit limit for these cards is based on factors like your credit score and credit history, and is generally determined by your lender. If you continue to demonstrate good credit habits, your lender may decide to raise your credit limit. While both are decent options, a secured credit card is the best option if it is within your limits. There are three key reasons why:
- Using a secured card can help ensure that you live within your means and avoid falling deep into debt when trying to rebuild your credit.
- A secured card can strengthen your credit score by helping you use credit wisely, and it’s a great card to start with when you’re first learning to use credit.
- When you have bad credit, unsecured cards may carry high fees or come with high-interest rates neither of which is beneficial for someone trying to build/rebuild credit.
Now we come to the essential question: utilizing all this gained information, how can people, especially college students, build credit? There are to explain how to build rock-solid credit, no highfalutin language needed:
- Pay all your bills on time. Easier said than done of course, as things tend to be. However, utilizing the automatic payment process can help it be very easily said and even more easily done. It is important to keep in mind that the later your payment is, the larger your bill will be.
- As discussed earlier there are two types of credit; secured and unsecured. A secured credit card is the best card to help you build your credit score.
- Become an authorized user. An authorized user is someone, typically a child, who is added to someone else’s, typically a parent or guardian’s, credit card. So any good credit on the original user’s card will appear on yours as well.
- Pay off any existing debt you have.
- Apply for a credit builder loan. This step is for those who don’t own or do not wish to own a credit card. This is the process of sending money through a middleman to the credit bureau on monthly payments. If paid on time and in full, the money will be returned to you. Doing this builds your trust and creditworthiness.
- Request a credit limit increase. It is important to note that you should keep your balance below or at the same amount when you do this. For if you increase the limit, and increase the amount you owe, it would completely disvalue your action of increasing your credit limit.
- Consider adding other accounts on your card. This can help you build credit and boost your credit score, which represents your creditworthiness as an individual, as well.
Best of luck to all, especially my fellow college students.