Becoming financially independent sounds interesting.
How about if you are required to achieve the same when you are still in high school or college?
Well, we have a straightforward solution for you.
No, we are not going to teach you how to become financially independent when your age is to rejoice and have fun, but we are seeking to help you understand how to build good credit when you are in college.
You must be wondering we started with financial independence and suddenly we jumped to credit.
To put it simply, having a good credit is one of the first steps to become financially independent.
It goes without saying that you may not be earning a lot to become financially independent at the college level, but you can start building your credibility from a tender age so that by the time you are in the corporate world or a start-up of your own, you don’t have to struggle for a guarantor.
Source: CBS News
So after setting the context of this blog, how do we start? Very simple, we will discuss the ways that shall help you develop your creditworthiness.
In this article
- 1.Pay off your balance each month
- 2.Never co-sign for friends
- 3.Use education loan for education-related expenses only and repay on time
- 4. Become an authorized user on your parent’s account or seek a guarantee from them
1.Pay off your balance each month
When you seek to build a good credit, you need to do your best to ensure you do not carry forward any balance of the current month to next month.
Firstly, you should avoid using a credit card while you are a student but should there be a situation that you get a credit card, you should use it only or the purchases that are within your affordable limits.
A credit card has a concept of total due and minimum amount due. Always pay the full amount due because if you pay the minimum amount due, you will be charged substantial interest on the balance amount that is likely to bring down your credit score.
Also, remember a student should have a credit card only if he/she has some income or part-time job.
While part-timing is more prevalent in the west, in India, you can always have some freelancing arrangement that provides you a monthly income to pay bills.
2.Never co-sign for friends
It is very likely that you would need an adult (typically parent/guardian/custodian) to co-sign your credit card/loan application.
Similarly, you may want to help your friends avail credit by co-signing their application.
While helping people in need is a great thing to do, but when it comes to money matters, try to avoid such friendships where you are required to provide a guarantee.
As a guarantor or co-signer, your credit score declines very fast should there be a situation that the primary holder defaults or elopes.
Source: The Old Black Church Blog
Typically it is seen that in India, students tend to take an education loan that is inclusive of books, hostel fees, mess fee and other expenses in addition to tuition fees.
Often banks tend to provide the student with a card with a limit equivalent to the loan amount for these expenses.
This is where you need to remain cautious.
Always use your education loan for your education-related expenses only. Partying, pubbing and other get-togethers are undoubtedly fun, but that should never be funded on leverage with a loan from a financial institution.
On the similar lines, it is seen that students tend to ignore the interest repayment of the education loan during the period of study.
Multiple banks these days offer an interest subvention scheme whereby the student or the guardian are not required to pay anything during the study period.
Use the scheme judiciously and in case you have opted for repayment of interest while studying also, ensure you are fulfilling the obligation on time.
You can always scout for part-time coaching opportunities to younger children or opt for freelancing opportunity to earn the interest component.
This is more relevant for parents than students. If parents are sure about their child is responsible, they should include him/her as an authorized user for their account.
As is said, “with great powers comes great responsibility”, these acts tend to make students more responsible.
A parent should not provide access to all your crucial bank accounts/cards etc. to his/her child but only the ones where limited liability can be created.
While this approach inculcates a sense of responsibility, it also helps develop a spending pattern. Additionally, parents can monitor expense and accordingly guide the younger generation for the future.
5. Use a Soft-Limit on Spending; Big Ticket Should be for emergencies only
Owning a credit card may provide you with tremendous flexibility but misusing the same also results in significant losses to credit and finances.
Thus, it is a good habit to put soft-limits per transaction or put a soft limit for daily transactions, etc.
These soft-limits can be applied with the help of the banker and prevents you from impulsive spending. You may use the card for any emergency such as medical reasons, etc.
6. Start Saving. Start Investing
Early to bed, early to rise; makes a man, healthy, wealthy and wise.
A similar thought process should be applied when it comes to financial well being. As a student, you may not have a fixed source of income.
Also, it is a time when you would naturally want to enjoy. But, amidst all this, you should develop a habit of saving Rs. 500 per month minimum and invest in mutual funds.
Lastly, will it help much?
Maybe not immediately, but in the long-term, it will surely help, as with a long-term horizon of 15-20 years, you can accumulate a sizeable wealth.
If you are not sure of funds, you may invest in liquid funds also which are safe and can be redeemed anytime.
This practice will make you a disciplined individual towards financial matters and will also help you accumulate some corpus that can be used for improving creditability.
Disclaimer: The views expressed in this post are that of the author and not those of Groww