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Establishing Credit as a New Graduate: a First-Timer’s Guide

Financial blogger Ash Cash shares his guide to getting familiar with credit basics. Learning the ground rules today can come in handy down the road.

In today’s world, if you want to achieve the American dream, chances are you’ll need good credit. When it comes to life’s “big purchases” (like a home or car) having good credit is key. The world is your oyster, especially as a new graduate, and even more so if you have good credit. If you’ve not yet begun using credit, that’s okay – but know how to get started so you don’t miss out on the big moments down the road that require an established credit profile.

Your FICO® Score Powered by Experian

Five aspects of your credit behavior are considered in the calculation of a very important number: your FICO Score drawn from Experian data. The five elements are payment history, which accounts for 35 percent; amount owed at 30 percent; length of credit history at 15 percent; as well as new credit and your credit mix, which are 10 percent each.

Between a Rock and a Hard Place

As a newcomer to credit, you might find that establishing credit can seem difficult – like something you have to already have in order to get more. You might be told you can’t get credit because you have no credit history, but in order to build a credit history you need credit. Talk about a conundrum! Don’t worry, though: secured credit cards were created for situations just like these, and can help you start to show responsible credit use. Once your foot is in the door and lenders can see that you understand the nature of your responsibilities, you’ll be able to qualify for the more traditional credit forms you’ve seen – credit cards and loans – at better terms.

Laying Your Credit Foundation

When you’re trying to build your credit, a secured credit card can be an important asset to prove your creditworthiness. In order to get started with a secured credit card, your creditor will likely require you to deposit money into a savings account, or use a certificate of deposit as collateral. This deposit is what makes a secured credit card different from a regular credit card. You may need to successfully manage a secured credit card account for up to 18 months before a lender will consider offering you an unsecured card. The decision will be based largely on your repayment history – specifically, whether you’ve made payments on time, and if you have kept your utilization ratio below 30 percent.

Account Management

A common rule of thumb is to purchase no more than you can comfortably pay off upon receipt of the bill. If you are not able to pay off the full amount, at least pay more than the minimum amount due. If you manage your secured credit card responsibly over time, it’s possible that your creditor may choose to refund your deposit, plus interest, and give you a traditional credit card.

Additional Variables

It’s also important to pay utility bills, rent and insurance premiums on time. Although on-time payments on a secured credit card are typically not reported to the credit bureaus, delinquent accounts that are turned over to a collection agency usually are. Even a solid history of employment can be helpful when you’re trying to prove you’re worthy of starting credit accounts for the first time.

Stay the Course

When you begin with a secured credit card and use it responsibly, you’ll be on your way to building and creating a credit history for yourself. Proving your creditworthiness those first few months can lay the foundation of responsible credit behaviors you’ll use for the rest of your life. As the saying goes, “You don’t have to be great to start, but you have to start in order to be great.” Make sure you’re putting your best foot forward as you start your lifetime credit journey.

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Experian.