College students face the ultimate Catch-22 dilemma within days of receiving the piece of paper that certifies them as working professionals. Many college graduates walk into prospective employer offices with the “No Vacancy” sign hanging over the front door. Employers decline the applications of recent college graduates because the grads don’t have the experience to secure employment. Therein lies the dilemma – you can’t gain experience unless you find a job.
A similar Catch-22 applies to college students trying to establish a credit history. Since a growing number of employers check job candidate credit histories, building credit during your college years is a sound financial strategy. However, you can’t build your credit score until a credit card company accepts your application, and most credit card companies refuse to provide credit to applicants who don’t have credit histories.
Because it’s difficult to establish credit during the time spent at four-year colleges and universities, many college students seek alternative ways to build credit. One of the options is taking out a student loan to build credit. The perception is paying off even a small student loan can help boost your score. With that being said, should you take out a student loan to build credit?
How Do Student Loans Impact Credit Scores?
Student loans require borrowers to make payments in monthly installments. The three primary credit bureaus view student debt as installment credit, which closely mirrors mortgages and automobile loans. When you take out a student loan and repay the principal and interest according to the loan stipulations, you bolster your credit because each of the three major credit bureaus receive a monthly report that verifies your timely repayments.
This demonstration of your responsible handling of credit increases your credit score during your college tenure. On the other hand, taking out a student loan and failing to meet the loan repayment obligations can damage your credit for years to come. And, if you have private loans then late payments can hurt your cosigner’s credit too.
You Should Have No Interest in Taking on Interest
So, you think you can pay off low interest student loans to build credit. With interest rates low, you don’t see any obstacles blocking your path towards the establishment of a credit history.
Think again, since it is never a sound idea to assume a student loan obligation that charges you interest on money you don’t really need. You can expect to pay hundreds of dollars in interest over the life of the shortest loans. You don’t want the burden of paying off interest when you can invest any money you earn during your college years.
Let’s say you encounter unexpected financial hardships that require you to take on additional student loans. Remember that student loans are typically not eligible for discharge during bankruptcy proceedings – no matter whether they are federal student loans or private student loans.
You’re liable for paying off every student loan you decide to take on.
Build Your Credit with a Student Credit Card
You can find the elusive Yellow Brick Road of credit by obtaining a student credit card and responsibly using the card for only emergency purchases, though a student credit card still requires you to pay the monthly minimum on time.
By following student credit card guidelines, you slowly begin to build your credit and enjoy the benefit of not having to pay any interest. The CARD act of 2009 makes it possible for college students to build credit, but most students need to include a cosigner, especially if they attend school full-time and have not reached the age of 21.
You can also build credit from someone else’s student credit card by becoming an authorized user. As an authorized user, you receive your own card for access to another person’s account.
A Job is a Terrible Thing to Waste
Most college students work only as a last resort to make ends meet. They work jobs that put extra cash in their pockets for the weekend. Yet, securing employment and holding the job during your four years in college demonstrates to creditors that you have a reliable source of income. The job can be completely out of you area of study or an entry-level position in your chosen field that you work until graduation. Credit card companies love college-age applicants who have strong work backgrounds.
Should you take out a student loan to help build credit? You’re better off starting with a student credit card and slowly building your credit by making just enough purchases to land on the three major credit bureau’s radar. You also want to make sure you can afford to pay more than the minimum monthly balance.
Most of the main credit card companies market student credit cards that come with favorable rates and have limited maximum credit amounts to prevent you from committing the ultimate credit sin – exceeding your financial means. You also earn points that you redeem for rewards. Search for a basic credit card that does not charge an annual fee and unreasonable interest rate.
Student loans should be for financing your education, not helping you establish credit.
Author: Dave Rathmanner
Student Loan Guides
Student Loan Reviews