Establishing a credit history and building a good credit score can be a bit of a Catch-22 for young adults.Take two of my daughters. Just as one was wrapping up her freshman year of college, she applied for a credit card and was denied because she has student loans (even though no payments are due until after she graduates).
Her older sister, who was about to graduate without any student loans, was denied because she had no credit record at all.It used to be that card applications were thrust into the hands of college students during freshman orientation. But it became harder for young adults to get a card following passage of the Credit CARD Act of 2009, which requires those under age 21 to have a cosigner or proof of independent income.
So what is a young adult to do? Here are some steps to consider, year by year, to help students begin building a strong credit profile.
Parents can start by adding their college freshman as an authorized user on one of their credit cards—but should do so only if they have good credit scores themselves, says Nancy Bistritz-Balkan, vice president of consumer education and advocacy at credit-reporting firm Equifax Inc. EFX 0.44% If they don’t, it could hurt the student right out of the gate. A good parental score is in the high 600s or above, says Ethan Dornhelm, vice president of scores and analytics at FICO, which created the credit-scoring model most lenders see.
Another good early option is a secured credit card, says Bruce McClary, vice president of communications at the National Foundation for Credit Counseling, a nonprofit in Washington, D.C. No credit check is required since the card is funded by depositing cash. The consumer essentially spends his or her own money and replenishes it each month by paying the bill.
At age 18, students can begin requesting free credit reports each year from the big three credit-reporting companies, Experian PLC, TransUnion TRU 0.72% and Equifax via annualcreditreport.com. This allows them to check for fraudulent activity and begin to understand how their profile is built. The reports won’t include a FICO score, however. Students may be able to get that free through their bank or by using Discover Credit Scorecard, an online tool. Free scores also are available through financial apps such as Mint and Credit Karma, but they use a model known as VantageScore 3.0, which can vary from the FICO score.
Some students have a car by now, subsidized by parents. Parents may be making the car payments, while the child covers gas and insurance costs. One way to help the student start building a credit history is to flip that arrangement: Have the student cosign the auto loan and make the payments, while the parents cover insurance and other costs. One caveat: The debt associated with that loan could hurt a child on future credit applications.
Experts say paying utility, cellphone and subscription bills on time, as well as responsible debit-card use, won’t bolster a student’s credit history. But students who live off campus and make reliable monthly rent payments can use services such as Rental Kharma or ClearNow to have those payments reported to credit bureaus, says Jeff Richardson, vice president of marketing for VantageScore Solutions. Many of these services require landlords to be registered and charge monthly fees.