5 Ways to Build a Good Credit Score from Scratch

Last Updated Jul 14, 2011 12:14 PM EDT

When is the right time for a college student to start building their credit profile? The simple answer: as soon as they are ready. You'll know by the way they budget their money, track spending and manage their checking or savings account and debit card.

Building good credit is a function of handling your bills responsibly. No teen or young adult should be set loose with a credit card or given responsibility for an auto loan until they've proven they can manage their cash. That means they must show that can keep up with obligations without constantly asking the Bank of Dad for more money.

Your child may be ready to handle credit as a freshman, especially if you are willing to look over her shoulder. I prefer sending kids to college with pre-paid housing, a checking account and linked debit card that will not permit overdrafts. This way they will not have any big monthly bills and can get used to the convenience of plastic without much threat of dinging their credit profile.

On the other hand, this approach does little to build good credit. Debit cards and checking accounts don't count for a whole lot from the perspective of the major credit bureaus. Which is why every college student should take specific steps to begin building a good credit profile. In the real world you'll want and need a potential employer or landlord or auto dealer who sees your credit report to find that you are dependable.

Contrary to what many folks believe, you do not start adult life with a top credit score that falls as you mishandle debt. You start with a moderate score somewhere around 600 (top score is 850) and must build it through a history of timely repayment on borrowed money.

My oldest daughter is entering her senior year at the university and for us this is the moment to start working on her credit score. Following an outline from Erik Larson, founder of NextAdvisor, a financially oriented comparison website, here's how we are approaching it:
  • Get a credit card This is easily the quickest and most effective way to start a credit profile. If I didn't think my daughter was ready, I'd find a pre-paid or secured card that reports activity to the credit watchdogs (it will say so on the application, or just ask). Because she is ready we'll choose from among the best-suited student credit cards.
  • Use credit cards wisely A credit card opens all kinds of ways to damage your score. Never miss a payment. Pay in full if you can. If you must carry a balance it won't hurt you unless your balance is relatively large. Never charge more than 30% of your credit limit and preferably keep it closer to 10%. And don't apply for more than one card at once or with any frequency.
  • Get another form of credit Having different kinds of debt helps your score. So an auto loan or personal loan or some other installment debt can help. It may even help to have a second but different kind of card, like a gas card or department store card. In some cases, buying furniture or an appliance on monthly terms can help. But you'll have to ask the finance company if they report to the credit bureaus.
  • Pay all bills on time If you live off campus, paying the cable bill or electric bill or even the monthly plan for a new desk or TV is a must. It won't do much to build your score. But if you slack off and get referred to a collection firm it's a major ding on your score.
  • Don't close an unused card account This is counterintuitive. Canceling a card can lower your score because it leaves you with less overall credit and instantly raises the percentage of debt capacity you are using. A long credit history is part of what makes for a high credit score. So keep those older accounts and make sure they are in good standing.
Photo courtesy Flickr user consumerist
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  • Dan Kadlec

    Daniel J. Kadlec is an author and journalist whose work appears regularly in Time and Money magazines. He is the former editor of Time’s Generations section, which was written and edited for boomers. Kadlec came to Time from USA Today, where he was the creator and author of the daily column Street Talk, which anchored the newspaper's business coverage. He has co-written three books, including, most recently, With Purpose: Going from Success to Significance in Work and Life. He has won a New York Press Club award and a National Headliner Award for columns on the economy and investing.

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