Congratulations! You survived the all-nighters, the internships, finals, and now...you're a college graduate. Welcome to the "real world"—which is full of new rules and various pitfalls that can trip you up and have a much longer effect on your life than, say, a bad grade or even a bad hangover. That's why it's important to get off on the right foot.
One of the ways you can set yourself up for financial success in your post-grad life is to make sure that you are taking good care of your credit history, which will help determine your credit scores. A credit score helps lenders assess how likely you are to pay your loans back on time.
Your Credit Score Is Like Your GPA
The higher your credit scores, the more favorable the terms on loans, including both interest rates and credit limits. Better terms can save you big bucks on everything from credit card spending to car loans to mortgages. And if you think you're a long way off from buying a home and don't need to worry about credit, think again. Insurers and landlords, to name a few, will want to know your credit scores now. What's more, excellent credit takes years to establish—which is why you want to get started now.
"It's good to think about this stuff early. Most people assume you only need credit if you're going to take out a mortgage or other loan. But if you rent an apartment after school, your landlord will check your credit. And some [utility] bill providers are allowed to charge you a fee if your credit is poor," says Kristin Wong, author of Get Money: Live the Life You Want, Not Just the Life You Can Afford. "It's an important part of your overall financial health."
Your credit history lives on your credit report, a historical record of how and when you pay your bills, how much debt you have, and how long you've been managing credit accounts. There are three main nationwide credit reporting companies that maintain credit reports on American consumers: Equifax, TransUnion and Experian (my employer and the publisher of this piece). They receive information from financial institutions and other companies you do business with on how much credit has been extended to you and whether you pay your bills on time.
Lenders then apply a mathematical algorithm to the information on your credit report to develop a credit score, a three-digit number that indicates how creditworthy you are. While there are a ton of different kinds of credit scores, most credit scoring models all take into consideration five important factors:
- Payment History: This is a record of if you are paying your bills on time and it is the one factor that affects your credit scores the most.
- Credit History: This score factor looks at how long you have been managing credit accounts. The longer your credit history, the more positive it is for your credit scores.
- Credit Utilization: This important "ratio" compares how much credit you're actively using compared with how much credit you have available to you.
- Credit Mix: This score factor looks at the variety of types of credit you're using, and is most beneficial to your credit score when you have a mix of credit types, such as revolving (credit card) accounts and installment loans.
- Credit Inquiries: Inquiries are a record of what companies have looked at your credit report. This could be a hard inquiry, which means you have applied for credit, or a soft inquiry when you have checked your own credit report or when a company you already do business with monitors your credit report. Hard inquiries can have a minor negative impact on your credit score.
Because you're a recent graduate, it's possible that there's not a lot of information in your credit file just yet. That's OK. You have the opportunity to build a positive credit history by making smart decisions right now, like paying your bills on time. Over time, your credit file will grow—and you have the power to make sure it's free of blemishes.
Check Your Credit Reports
So now that you know what a credit report is, your first step to post-grad financial success is to actually check your credit reports and make sure the information in them is accurate. You are entitled to a free credit report from each of the credit bureaus once a year. To access them, visit annualcreditreport.com. Many experts suggest checking a different one every four months, so that you end up reviewing all three over the period of a year. You can also get a free copy of your Experian credit report here on Experian.com.
Your credit report will include the following sections:
- Personal Information: This includes information like your name, addresses, employers, etc.
- Accounts: All the accounts open in your name, like credit cards, student loans, mortgages, etc.
- Inquiries: Records of when and which companies pulled your credit report for a credit application.
- Public Records: With the exception of bankruptcies and civil judgments no longer affect credit decisions.
You should review each section to make sure the information is accurate. Do you recognize all the accounts that appear there? If not, you'll want to investigate why that account appears on your report and whether someone has fraudulently opened an account in your name. You'll also want to review each account to ensure that account status is correct. If anything on your credit report is incorrect or looks "off", you may need to initiate a dispute to get it corrected.
Get a Credit Card and Be Smart About It
One of the ways to establish and improve credit is to open a credit card and make sure you're using it wisely. That means always paying it on time, and ensuring you're not using more than 30% of the card's credit limit.
That's because your credit utilization ratio, or the amount of credit you use compared with the amount of credit you have available to you, is an important factor in determining your credit scores. For a good credit score, you want to keep your utilization under 30%, and for the best scores, under 10%. So if you have a credit card with a limit of $1,000, you will want to keep your monthly balance to $300 or less.
"If you want to build your credit further and faster, opening a new credit card can help you do that—but it only works if you avoid going into debt," Wong says. "If you get a little too excited trying to furnish your first apartment with IKEA and end up revolving a balance and maxing out your cards, that's dangerous territory for your credit. Basically, you want to have a lot of credit available to you, hence opening the card, but you want to use it as little as possible."
How to Get Credit for the First Time
In order to get access to a credit card, you typically have to have some type of credit history. Maybe you have started paying off a student loan (more on that later), or maybe you had a credit card with your parents in college that helped you establish some credit. Of course, it's possible you don't have much of a credit history at all, which can make it difficult to get access to a traditional credit card.
Don't stress. You can start by opening a secured credit card, which requires the cardholder to submit a refundable security deposit in order to open an account. That deposit is typically equal to the amount of credit that will be extended to you. You can use the card just like you would any other credit card, which means you can charge your purchases and then make payments on them on a monthly basis. Generally, if you make payments on time over the period of a year, your secured card can be converted to an unsecured one, or you will have built up enough credit to apply for a different unsecured card.
Another way to build up your credit is to get added as an "authorized user" to your parents' credit card. That means you will get a credit card with your name on it, and you can use it to make purchases—but you're not legally obligated for paying the debts on the account. (That responsibility belongs to the primary account holder.)
However, most card issuers will report the account's history to the credit bureaus for an authorized user, as well. (Not always—which is why you should always check.) If the account history is reported, some of your credit scores may get a little boost—but only if the account you've been added to has been open for a long time and the primary account-holder pays the bills on time.
"Just make sure your parents have a history of paying it in full and on time, otherwise, it's going to have the opposite effect on your credit," Wong says.
Make Paying Bills on Time Your Mantra
We can't emphasize the importance of paying your bills on time enough. The number one way to build a positive credit history is to pay your bills on time, every month. No exceptions. Late payments are a surefire way to drag your credit scores down—for a long time. That's because most negative marks on your credit report, including late payments, stay there for seven years. So one slip up can have a lasting impact.
Susie Henson, one of Experian's credit educators, debunks one of the common myths that carrying a credit card balance can help build your credit and improve your credit scores.
"Carrying a credit card balance will not improve your credit scores. Pay your bill on time, and as often as possible, pay the balance in full so you are not paying finance charges on your credit cards," said Henson. This video explainer goes into more detail.
Stay on Top of Your Student Loans
We all know that graduating from college can often mean being saddled with student loan debt. And while that sucks, it does have a silver lining: A student loan can help you establish credit history and contribute to your credit mix. Most credit scoring models reward consumers who have a mix of credit on their reports, which includes revolving accounts like credit cards, and fixed installment accounts like student loans and mortgages.
"If you have a student loan, its mere existence will help you establish credit. After you graduate, make your monthly payments on time, and you'll be in good shape," says Wong.
You can also find ways to whittle down the interest rate on your student loans. Many lenders will offer an interest rate discount if you set up automatic payments or pay your loan online. Take advantage of that if it's available to you, because your benefits are twofold: You'll pay less in interest, and you'll be less likely to miss a payment, thus building a positive credit history.
You might also consider consolidating your student loans, which means rolling them into a new, single loan. For more information on student loan consolidation, visit our comprehensive guide here.
Ace these credit guidelines, and there's no limit to where you can go in your post-graduation financial life!