University tuition and crappy credit history

November 26, 2007 3:00 PM

I'm about to go back to university and I have all of the tuition money for the next 2-3 years (yay me). What's the best way to pay it so that it improves my credit history?

I immigrated to the U.S. fairly recently and have very limited credit history in the U.S.

I have 1 credit card (a crappy one from capital one with a $500 limit) and the few times I've applied for other cards with higher limits/better terms I've been rejected. I have never exceeded the limit, I've never made payments late and I've been generally pretty good about paying as much as I could on it every month.

I'm about to go back to school and I know I can pay the tuition fees right off the bat (no loans, no nothing). Is there any specific way I should go on about doing this that may improve my credit history/score?

posted by icarus to work & money (7 comments total)

There is no risk in putting as much of the tuition on your credit card as possible (books and such too if your limit allows it). Just be sure that you pay it off in full every month. After a few (~4-5) months of that type of behavior, you should be able to convince them, or another Credit Card Issuer that you are good for a higher limit. At that point, you should use that card every month for as many of your normal purchases as you can (assuming you can pay it off).

Avoid using your debit card or cash for anything as they do not help you build credit. Meanwhile, keep the funds that you have already accrued in a high yield savings account (something like ING direct for example). If you know that you do not need sizable chunks of it for a while, you can invest in something a little less liquid, like CDs. Doing this allows you to make money on your money while building credit and going-to/paying-for school.

Best of luck!
posted by milqman at 4:42 PM on November 26, 2007

I am not absolutely certain, but I think that just about the only way to improve your credit history is to take out a loan or have some sort of line of credit, and make payments regularly. But, I was in a similar situation to yours not too long ago. I had a card with a $500 limit that served me well through college, but once I graduated, I found myself pushing up against the credit limit every month, even though I wasn't carrying a balance from month to month. I was also denied credit cards (!) when I applied for them, even though I had never missed a payment. It seemed quite unfair.

The mystery was unraveled when I subscribed to a credit reporting service for a year (either Experian, TransUnion, or Equifax). I was able to get unlimited credit checks, and I saw that your "use of available credit" counts for a huge amount in your credit score-- that my FICO would bounce between 580 and 780 depending on whether I was carrying $100 or $400 on it at the time. (which is a huge swing)

So, to get another credit card, just stop using the one you have for a month. Also, your application will be looked upon better if you elect to "transfer over your existing balance", so maybe you should keep 100 or so outstanding for that reason.

Anyway, it took a while to figure all that out, so what actually worked for me was calling my current card provider and asking for an increase. That got my limit raised substantially.

Finally, you can check your own credit history free with the big three firms once a year in the US, so that may be something you would want to try.

Good luck.
posted by Maxwell_Smart at 4:44 PM on November 26, 2007

FICO Score is quite informative too, and includes instructions on obtaining your credit history free.
posted by Maxwell_Smart at 4:46 PM on November 26, 2007

take out a loan, then put your cash into mutual funds that pay at a higher interest rate than the rate charged on the loans.
posted by thinkingwoman at 4:51 PM on November 26, 2007

Yes, and this is a 6 for 1 deal... oh you've never had it so good.

1) Take your money and go to your local commercial bank and get a secured loan. They may require 100% collateralization, meaning you have to give them $1000 to get them to loan you $1000, if you have bad or no credit.

2) take your loaned money and put it into an ING online bank account and pay your loan interest payment to the bank, automatically, every month (you can set that up online). Do not mess this up. Set it to pay ontime, always.

3) Go to the school's financial aid office, and get a loan from the state for tuition. You don't tell them you have money for tuition. You will need to fill out a FAFSA, they'll give you the forms. In 2 weeks time you'll hear back. Accept the loans that are <5>
4) Take the remaining ING balance that isn't being used for your loan interest payments back to the bank, open up an etrade account online and put your money into tax-free municipal (zero risk) bonds. Earn higher interest than ING while your money isn't being used. Liquidate it as necessary to pay off your loans. You'll have to pay capital gains tax on the earning, but who cares. You can't build/repair credit at this impossibly low price.

If you also have a job concurrently with going to school...

5) Go to your local credit union, open up an account, make regular deposits, and they'll give you a credit card. More credit history. Every month, spend >$100 and pay it off before the "grace period" is over. Didn't cost you any interest and you get more credit history. If you have a lot of money, spend to within 10% of the credit limit and pay it off instantly, every month. Every six months call the card company and ask for a credit line increase. They'll give it to you.

6) Go to a local small private bank. Not a big commercial bank. Open up an account and make small deposits regularly. Ask for a credit card after six months. And then come back later and get "overdraft protection" added to the account. Congrats, you just got two more lines of credit and more credit history. Spend and pay off before the grace period just like before. If you have the extra income, do the same with the credit line increases by getting to, but NOT EXCEEDING the credit line amount.

The important thing about credit cards is they are a game. You want to spend a lot, not hit your limits but come close, and pay it off before the grace period so you don't incur charges.

By the time you are out of college, you will have excellent credit history, perfect credit, and probably >$30,000 of revolving credit line, and have earned interest higher than your loans accrued. You're now better than 99.5% of America's population, and you can buy a home. I don't guarantee the legality of using a school loan for things other than school, check your local laws.
posted by torpark at 5:00 PM on November 26, 2007 [2 favorites has favorites]

Re: torpark's advice - tax-free muncipal bonds aren't zero risk unless you buy actual bonds that come due on the date that you need the money. Otherwise, the value of the bond will fluctuate with interest rates.
posted by metahawk at 10:39 PM on November 26, 2007

you can check your own credit history free with the big three firms once a year in the US, so that may be something you would want to try.

link
posted by philomathoholic at 1:03 AM on November 27, 2007