Understanding Credit as a Student – Credit is likely to be one of the last things on your mind as a student, as you get to grips with your new timetables, lodging, companions and routines. But whether you’ve just got your acceptance letter or are already there, managing your money for the first time and consciously thinking about your finances is a key element of setting yourself up for success in the future – so it’s well worth taking the time to ponder.

Developing a positive credit score and attitude to spending will help you reduce stress, enjoy yourself without financial anxiety, and also pave the way for better interest rates on things like mortgages later down the road. But where should you start? This short guide explores how to understand credit and use it to forge a more prosperous future. 

What is Credit?

Credit is essentially borrowed money to help you buy something now and pay for it later. As a financial tool, it can be immensely helpful, but you need to be sure you can repay what you borrow. When you take out credit from a bank or credit card company, you agree to repay the borrowed amount within a specified period, plus any applicable interest.

Interest rates vary depending on your circumstances, credit score, and the entity offering the credit. Your credit score is a representation of your trustworthiness, to indicate to potential lenders how reliable you are with repaying your debts. If you miss payments or have to default on loans (in essence, declare you cannot repay them), then your credit score will be negatively impacted. 

The scores range between 300 – 850, and a good credit score is usually considered anything above 700, but it does depend on your personal circumstances and credit history.

Why Do You Need It?

As a student, building your credit score is crucial for opening the doors to financial opportunities. It allows you to borrow large sums of money upfront, rather than having to save for years to purchase large items such as a car, mortgage or business set-up. The higher your credit score, the lower the interest rate – as a general rule – saving you more money in the long run. 

Even if you are excellent at saving and never borrow money to purchase items, building your score demonstrates that you are responsible with your money and aren’t reckless. Landlords often check your credit history as part of the application process, to ensure you can be trusted to pay your rent on time. Plus, many employers will run a soft credit check – especially if you’re looking at financial roles. So whether you are planning to borrow money or not, it’s a good idea to start taking it seriously early on.

How Should You Start?

• Learn to budget – Before considering taking out any form of credit, you should commit to budgeting your money wisely. This doesn’t have to mean staying on top of a complicated spreadsheet; a simple incomings vs outgoings table can help you stay on top of how much spare cash you really have each month. Some banking apps even have built-in tools to help you manage your money and notice trends and patterns in your spending habits, which can make you more aware of how much you could dedicate to repaying a loan or credit card.
• Student credit cards – To start building your credit score, you could choose to take out a student credit card. Many banks offer special deals exclusively for students, which is a brilliant way to introduce yourself to the idea of borrowing money. These cards usually have lower limits and fewer rewards, but they are a good starting point if you’re unfamiliar with credit.
• Make timely payments – Your payment history is one of the most significant factors influencing your credit score. Once you’ve taken out credit, be sure to put money aside to at least cover the minimum repayment amount each month. Being smart with your money means always paying your bills, and debts, on time, whether it’s for credit cards, student loans or car repayments.
• Keep your utilisation low – When you are accepted for a credit card, you will be allocated a credit limit. This is the maximum amount you can borrow – but avoid being tempted to spend it all. Keeping your credit card balance well below the limit will avoid negatively impacting your score and make it much easier for you to repay the debt without falling behind and getting into financial trouble.
• Limit credit application –Every time you apply for a loan or credit card, a ‘hard search’ is done on your credit report. Not only can this temporarily lower your credit score, but too many searches in a short period of time are a red flag to potential lenders and make you less likely to be accepted into any credit agreements. 

Build Healthy Financial Habits

Whilst building a credit score is something of an essential part of adult life, building healthy financial habits has to come first. As a student, your financial history is a blank canvas, so you need to make sure you start painting the picture that will serve you well in the future. By starting small and staying disciplined, you can make informed financial decisions to lay a solid foundation for your coming years – all whilst enjoying student life. 

Disclaimer – The views expressed in this blog are those of a third party and do not reflect the views and opinions of the SecureMyScholarship team.