Since high school I’ve always had some strange fixation with my credit score. In the effort of winning this ‘game’ (win = high score) I’ve talked with a lot of different people (both students and those in the credit industry) and tried many different strategies. Some definitely worked better than others and a certain few actions were more effective than all others combined. As I got a bit older and my credit score became higher (it’s now right around 800/850) I began to see the benefits of having a high score. For example, I just applied for a premium credit card with awesome perks—as a student—and was instantly approved with a $13,000 credit limit (a new personal best). I’m no longer asked to put down a $600 security deposit when opening a new cell phone line and I could get a super competitive rate on any loans I wanted to take out. While these may not seem like big perks now, when you get close to graduation you’ll thank yourself for paying attention. Because I like you, I’ll condense the past 5 years of my hard work and observation into 5 steps that if taken, will get you a killer credit score.
As most people who read this are in their teens/early twenties, I’ll assume you have no credit score. For those who have already started and have low scores you should work on fixing your score first, although reading this should be beneficial to you as well.
1. Get a credit card no matter what
That’s right, I said it. Keep in mind that credit scores are not meant for the individual, they’re designed as a metric for the bank to see how much of a credit risk you are. No matter what you’ve heard, if you want to build a great credit you need to use credit—the easiest way of which is through credit cards. However, I guarantee that if you’ve applied for a card without any history, you’ve been rejected. Why? Because the bank has no idea if you’re a risk or not. Rather than take the chance, they leave it up to you to prove it to them first.
Solution? Start off with a secured credit card. This works by giving the bank a deposit (I originally started with $300) that they keep for a year (and they don’t pay interest, either). In exchange they’ll give you a full-on credit card with a credit limit of the security deposit. After a year passes and you’ve shown good usage, the card converts to unsecured. Keep in mind long-term these cards are not very useful (5 years after opening my secure card it now has a limit of $1800), however they are crucial for beginning your credit history.
Important: make sure to… pay off your credit card in full each month. Treat it as if it were a debit card and don’t spend more than you have. Now more than ever, your credit is in an especially fragile state and you want to have a pristine payment history.
Protip: you can easily set up an automatic credit card payment from your checking account to pay your credit card off in full each month. As long as there’s money in your checking account it’ll automatically pay, saving you the stress and time of doing it yourself.
2. Poach from someone else’s credit
The idea here is that you find someone with a great credit score and ask him or her to add you on to his or her credit card as a joint account holder (different from an authorized user). This is usually pretty easy and all it takes is the account owner filling out and sending in a form to the issuing credit card company. Once you’re added the credit card will appear on your credit record as if you’ve had it since the day the card was opened, making this especially powerful for cards that were issued a long time in the past.
This method works solidly, however the biggest hurdle is convincing whoever owns the credit card to add you.
I’d first explain the importance and function of this to a parent (if they have a high credit score) and see if they’ll add you. You could next try other family or even close friends, it doesn’t matter the relation as long as you trust the person and they’ve got a great credit record. To protect both of you, you’ll want the account owner to destroy ‘your’ card upon receiving it. Remember, the only goal here is to be attached to the account’s history, not actually use the card.
This is probably the most powerful step you can take when getting started. It’s also probably the most difficult, as it relies on having a close friend with a high score who’s willing to do this.
Note: you can also do this with traditional loans as well (get the above friend to ‘co-sign’ the loan and they’ll approve/deny based on their history). Loans can be as small as a few thousand dollars and you don’t even need to buy anything with the money, just put it into an account and let it sit if need be. You’ll pay a small bit of interest over time, however the positive impact is worth it.
3. Don’t close lines of credit
Banks take into account the age of each of your credit cards when determining your score, so you’ll want to be sure not to close credit cards. Therefore, with slight exceptions, I suggest not picking credit cards that have annual fees. Usually these are ‘free’ for the first year and then charge on the second year. The inclination here will be to cancel the card after your first year when the fee comes due. There are plenty of great, rewards-issuing cards that have no annual fees, start there.
4. Use a boutique bank
I came across this one completely by chance when I went into a UBS investment branch after wanting to put some summer earnings in a Roth IRA. Banks like UBS are ‘high-end’ (read: for rich people) and don’t expect college aged students to open accounts.I played this to my advantage in several ways. First, everyone who opens an account with UBS (think the minimum may have been an initial 3-5k deposit) is given a UBS Visa Signature card. From my understanding they didn’t deny UBS clients, just changed the credit limit depending on their credit score. As my score was relatively low I was initially awarded somewhere around a $2k limit (which actually wasn’t bad in itself). I then social engineered the credit card company and managed to get the contact info for the actual person setting the credit limit.I finally (this took a lot of effort) got her on the phone and made friends. She said she had initially set it so low due to my lack of history and that she’d consider increasing it as I made on-time payments. I then proceeded to call her back every three months and each time she increased the limit by a few thousand dollars to my present level of $10,000 (it’s not worth my time anymore to keep pestering her). Having a credit card with that kind of limit did wonders for my score, not to mention the line has now been open for several years.The whole ‘talking to the card issuer’ part of this story is optional, however I think you’d probably find luck getting a card at a boutique bank. The downside? The bank has minimum account limits (which is fine, as I have those original summer savings still sitting in the Roth IRA) and more impactful is that for the Visa Signature cards there’s an annual fee of $250 (ouch!). At the time the tradeoff for the high limit was worth the cost (I was also working full-time), now not so much.
5. Open store credit cards
I’m sure you’ve been asked at least once when checking out at a department store if you’d like to open a store credit card to save xx% off your purchase. Most large department stores have ‘in-house’ credit cards to cut Visa, American Express, and the like out of their their profit margins. These store credit cards usually have lower credit score requirements to obtain, yet they report to the credit bureaus exactly the same as traditional credit cards do. This is a great place to start and you can also get some pretty steep discounts on whatever you’re buying, too. I once did this with Macy’s, chaining together the discount for opening a card (around 50%) with another discount coupon I found (15% off) and did it all during a sale. I ended up getting around 75-80% off each item I bought and was able to stock my closet up well beyond my traditional means because of it.
While there are many other ways to boost and maintain your credit score, I’ve found the above to be some of the very best ways, especially for students. The sooner you get started on this stuff the sooner you can start building your credit history – the key to a high score.
Useful tools to help:
CreditKarma.com is by far the best site I’ve found to monitor your credit rating. Using the site is a ‘soft-inquiry’ on your credit record, which means it won’t lower your score.
Thoughts? Stories of what’s worked for you? Share them in the comments below!