The Power of Credit Early: How Building a Credit Score in College Can Save You Thousands Later

Most students mistakenly believe that building a good credit score can be delayed until later in life, once their careers are more established. In fact, this is the best time to start building up credit by borrowing and diligently repaying small sums.

Having a good credit score is about more than just getting a loan approved; it also affects the cost of borrowing, insurance rates, phone plans, and, in some cases, employer background checks. In the long run, students who ignore credit scores end up paying much more than those who start building credit early, taking small steps.

The goal is to establish a financial track record that proves you're a trustworthy person who can take on financial responsibility. This is done by more than just taking on debt. In this article, we'll explain why it matters and how to do it, even when starting with modest means and taking on academic obligations.

Understanding the Basics of Credit Scores

A credit score is a three-digit number that reflects a person's ability to manage the money they have borrowed. There are several scoring models, but the most common are FICO and VantageScore. A borrower should know how the score is calculated and how to improve it. A credit score is based on five factors:

·         Payment history, which makes up 35% of it. It simply means if you're paying your bills on time. The score is lowered every time you miss a payment.

·         Credit utilization, which makes up 30% of the score. This is the percentage of the credit limit you're using. The goal is to stay below 20% except in an emergency.

·         The length of credit history accounts for 15% of the score. This is why it's important to start thinking about it in college, since it helps to start early.

·         Credit mix accounts for 10% of the score. It helps to use a variety of financial tools, such as loans and credit cards, as it shows you're able to use different tools.

·         News, credit, and hard inquiries account for 10% of the score. Those who open too many credit lines one after another hurt their score.

When different borrowers apply for a loan, how a bank will treat their inquiry depends on their scores. It will also affect their interest rate or whether their loan will be approved at all.

The Real Cost Difference: How a Good Score Saves Thousands

Let's examine two approaches to building a credit score.

Student A opens a student credit card at 18 and repays their debts. At 24, they'll have a credit score of 740.
Student B opens a credit card at 24, after leaving college. At 26, their credit score will be 640.

Now imagine both apply for the same loans:

Auto Loan (5-year, $25,000):

Good credit (740): ~5% interest → total interest ≈ $3,300

Fair credit (640): ~12% interest → total interest ≈ $8,400

Savings: $5,000

Mortgage (30-year, $300,000):

Good credit: ~6% interest

Fair credit: ~7.75% interest

Difference in lifetime cost: ≈ $110,000–$140,000

There are other benefits to a good credit score. For instance, alongside the car loan, a student also needs to pay an insurance premium. Those will also be lower for the borrower with a good credit score. Rental deposits can be affected by credit score, since landlords use them to determine whether a renter can be trusted. These add up over time.

Not Overlooking Investing

Focusing on credit building as a student is a smart move, but it doesn't limit the student's financial efforts toward other goals. Many feel that it's too early to start investing as a student, and most students can only achieve limited goals in this regard.

However, according to experts such as those at CryptoManiaks, students can start seeding, staking, and even trading small amounts of crypto with limited initial funds. Crypto assets are known to grow rapidly and increase in value, as they are volatile. By starting early and holding on to assets, students can get a head start on investing while building a credit score.

The First Step: How to Safely Start Building Credit in College

The key to starting your financial path isn't having a lot of income early on, but choosing financial products that suit your financial standing. There are a lot of beginner-friendly options to choose from.

Student credit cards are designed for those with little to no financial history. They have low limits and a very simple reward structure, but they do allow users to borrow. Most importantly, they report to Experian, Equifax, and TransUnion, thereby building credit scores.

Secured credit cards are also an option. Students with no income often use them. A holder deposits funds, which become their credit limit. As long as the holder pays it back on time, they work on their credit score.

Parents and relatives can add the student as an authorized user to their own credit card. That way, they can inherit a portion of the credit history without actually using it. The students can also use and repay the loans made with the card, as a way of practicing personal responsibility.

When choosing a beginner-friendly option, students should prioritize cards that report to all bureaus, those with no annual fee or a low annual fee, cards with a low annual percentage rate if their goal is not to carry a balance, and cards with easy-to-use apps.

Having a card to build a credit score doesn't mean that you need to make purchases and go into debt. In fact, it's wrong to go into debt just because you can. Instead, you can use the card for everyday purchases as long as you're sure you will repay the balance and build your score.

Smart Habits for New Credit Users: The Student Playbook

Once a student gets their credit card, there are a few simple habits they should cultivate to avoid getting too deep in debt and to improve their credit score in the process. These work regardless of the amounts you have to repay.

·         Automate your minimum payments. The biggest scoring risk is late payments, and automating the minimum amount resolves this problem. You can always pay more after the minimum amount has been taken care of.

·         Never utilize more than 30% of your limit. That way, the lender knows you're not overextending yourself.

·         Don't open too many cards at once. Stick to the one starter card at first and wait for a year to get the second one.

·         Make sure to track your spending carefully. Most cards have an app that allows you to do so, but it also helps to make a spreadsheet of your own. It helps categorize your purchases so you can make broad decisions about where to cut spending and what to prioritize.

·         Credit isn't an income source. It's a tool to make purchases you can't afford to pay for right away. This is the mindset to use when deciding to make a purchase using your cards.

·         Always pay your monthly balance in full when you can. Credit debt is expensive and not necessary, and paying off the full balance accelerates the growth of your credit score.

Common Credit Mistakes to Avoid

There are a few common mistakes that many young people make, and that are easy to avoid simply by being aware of them and carefully planning your financial future.

Forgetting Due Dates

This is the biggest mistake to make, and it affects the credit score the most. It's also the easiest one to avoid since payments can be automated. It also helps to set aside one day each month to handle all the bureaucratic business of owning and maintaining credit cards. That way, nothing gets overlooked.

Maxing Out the Limits

Never max out your cards, as that can hurt your credit score and increase your debt. Emergencies are the only possible exception, and they must be genuine emergencies. Maxing out the card can damage the score by as much as 80 points.

Letting Small Balances Snowball

Sometimes users forget to address small balances because they may seem unimportant in the long run. But when interest is factored in, these can snowball and become expensive.

Using Store Cards

Store credit cards that can only be used to buy products at a specific store often offer cashback as an incentive to get one. This may seem like an attractive offer, but APRs on these cards tend to be much higher than those on bank-issued cards.

Closing Cards Too Early

Closing a card can lower your credit score. If the card doesn't charge fees just to remain open and in use, keep the card open even after you've paid off the debt.

Advanced Credit Card Moves

Once a student has mastered the basics of using a credit card, they should move on to more advanced methods to build their credit score. These are more sophisticated, but they work based on the same principles. The goal is to fulfill your obligations on time and build your credit score.

Credit Builder Loans

These small installment loans work differently from traditional loans. The lender places the amount into a locked savings account while you make monthly "payments" toward it. When the set term ends, the borrower keeps the entire amount while building a credit score.

A Second Credit Card After 12–18 Months

Once you've had a card for over a year and manage to use it responsibly, it may be time to get a new one. The extra card will increase your credit limit, thereby reducing your utilization percentage even if your spending remains the same.

Requesting Credit Limit Increases

Most card issuers allow their users to increase the credit card limit after 6 months of good behavior. With some banks, that option is available only after 12 months. An increased limit gives the user more breathing room and reduces the utilization percentage, since you can borrow more without changing your habits right away.

Monitoring Your Score

Some cards come with an app that lets users monitor their credit score at any time, without paying bank fees for the service. It's a valuable feature, and after you've built up the score, you should keep track of it.

Long-Term Wealth Benefits: How Early Credit Boosts Your Future Financial Life

Having a good credit score will have many long-term benefits for your financial life. The most important of these is the lowered cost of borrowing. On a large loan spanning years, a 1% lower interest rate could amount to hundreds of thousands. The same goes for reducing insurance premiums, which is common for those with good credit.

Those with strong credit also qualify for higher limits, better rewards, and more favorable loan terms in general. It provides greater financial flexibility, which is especially important for students who someday hope to start a business of their own. With such flexibility, it's also easier to invest or buy property.

Conclusion

College may be the best time to start building a good credit score by getting credit cards and using them responsibly. In the long run, this allows the student to take advantage of financial tools and secure better loan and card terms. It also lowers the cost of their insurance premiums.

A credit score is easy to build if you're willing to take on cards, get into debt on purchases you already planned to make, and pay your bills on time. After a while, a student could take on a second card or get a starter loan. That way, they would diversify the services they use and further improve their credit score.