5 Ways for Recent Graduates to Build Good Credit
You’ve got your college diploma. You’ve been offered a job. Welcome to post-grad life.
Now it’s time to pay attention to your credit score — the all-important figure lenders use to assess how likely you are to meet your financial obligations.
A higher credit score can get you more favorable terms on loans, including lower interest rates and higher credit limits. You could save big bucks on car loans and mortgages.
- 5 ways for recent graduates to build good credit
- 5 factors that make up a credit score
- How to get started on building a credit history
- Building credit: It’s a marathon, not a sprint
5 ways for recent graduates to build good credit
To start building your credit, consider the following steps:
- Check your credit score and dispute any errors on your credit report. You can receive a free credit report from each credit bureau once a year at AnnualCreditReport.com.
- Pay student loans on time.
- Don’t close student credit cards.
- Get a secured credit card.
- Start small with credit.
“The simplest thing is often the most poignant,” said Thomas Smythe, the John D. Hollingsworth Jr. professor of business and accounting at Furman University in Greenville, S.C. “And that is just paying your bills on time, whether it’s your rent or the power bill or whatever. Because if you don’t, sooner or later those kinds of things will end up on a credit report.”
Additionally, making student loan payments on time “is absolutely crucial,” he said.
Smythe recommended students, even before they graduate, get a credit card in their own name with, say, a $1,000 credit line, if approved.
He urged sticking to intermittent use, unless it’s an emergency. Charge a tank of gas, and then a few days later go online and pay the balance.
“The idea is to get that pattern started,” Smythe said.
One thing to avoid is the minimum monthly payment trap. Credit cards require a minimum payment that is typically 3% of your outstanding balance, though there may be a $25 minimum. Your remaining balance will accrue interest, making it more expensive in the long run to make minimum payments rather than paying your total balance every month. Paying the minimum can also make it take a lot longer to get out of debt.
That means you should be especially disciplined with your credit but also spending in general.
Credit reporting agencies receive information from financial institutions and other companies on how much credit you have and whether you pay your bills on time.
Smythe said it’s important to remember that credit scores can influence other facets of your financial life, such as getting a job and your car insurance rates.
5 factors that make up a credit score
Most credit scoring models consider five important factors:
- Payment history. This factor affects your credit score the most.
- Credit history. The longer your credit history, the more positive it is for your credit score.
- Credit utilization. This ratio compares how much credit you use with how much you have available. For a good credit score, you want to keep your utilization under 30%, and for the best scores, under 10%. That means if you have a credit card with a $1,000 limit, you should keep your monthly balance to $300 or less.
- Credit mix. Your credit score benefits most when you have a mix of credit, such as revolving accounts (credit cards) and installment loans (car loans, mortgages).
- Credit inquiries. Inquiries are a record of who has looked at your credit report. Hard inquiries occur when you apply for credit, while soft inquiries occur when you or a company you do business with checks your credit report. Hard inquiries can do a minor amount of damage to your credit score.
How to get started on building a credit history
To establish a credit history, you can start with a secured credit card, which requires a deposit to open an account. Typically, the deposit equals the amount of credit that will be extended to you. You can use the card like you would any other credit card, meaning you can charge purchases and then make monthly payments.
Many of these cards include a “graduation” component so you can move from a secured card to a traditional credit card after establishing a consistent payment pattern, according to the Consumer Financial Protection Bureau (CFPB).
The CFPB noted there are also credit-builder loans. Financial institutions, typically credit unions, deposit a small “loan” (often $300 to $1,000) into a savings account. You then pay back the institution with payments over six to 24 months.
Building credit: It’s a marathon, not a sprint
Smythe and others have noted that starting out in the financial world can be confusing. Just remember that building good credit takes time.
Don’t be late on payments because even one mistake can have lasting consequences. Late payments can stay on your credit report for seven years.
You can build a positive credit history by making smart decisions right now, like paying your bills on time. Over time, you’ll get to watch your credit score grow.