When you apply for credit, the finance company or bank reviewing your application checks your credit score to determine whether you have a history of paying your bills on time. College students often struggle to obtain credit because they have no prior credit history and lenders have no data upon which to base credit underwriting decisions. Nevertheless, as a student there are certain steps you can take to quickly establish a credit history.
Student Card
Since 2009, federal law prevents banks from offering student credit cards to people under the age of 21 who do not have an income source. If you work part time and have minimal expenses, you can qualify for a student credit card in your own right even if you have no prior credit history. Typically, student credit cards have low line limits and very high interest rates. However, by using the card and paying your monthly bill on time you start to build a credit history and eventually that enables you to obtain other low-rate credit cards.
Co-Signer
If you have no income source and rely on student grants and parental contributions to cover your college costs, you can still obtain a student credit card or loan if a parent or guardian agrees to act as the co-signer. The co-signer must have good credit and sufficient income to cover his own existing debts as well as your student credit card or loan. The debt technically belongs to both of you and you are both liable for paying it off, which means some parents are reluctant to act as co-signers for fear that their child will run up the debt and not pay it off.
Cash-Secured Loan
Generally, banks run your credit when you apply for any type of loan. However, you can qualify for a cash-secured loan regardless of your credit history or lack thereof. Cash-secured loans normally entail opening a certificates of deposit and the bank issuing you a loan with a balance that amounts to less than the sum of money you deposited into the certificate of deposit (CD). You pay interest on the loan but earn interest on the CD. The lender keeps your CD if you fail to pay off the loan and loan payments are reported to the credit bureaus, which means you quickly establish a credit history.
Piggybacking
If you lack the funds to open a cash-secured loan and your parents do not wish to co-sign on a student credit card, you can establish your credit by becoming an authorized signer on someone else's credit card. An authorized signer has access to a credit account and any activity on the account impacts the credit score of the authorized signer as well as the person who originally established the account. Industry insiders call this method of establishing credit "piggybacking." Parents and guardians sometimes prefer piggybacking vs. co-signing because they can more easily monitor the account.
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