Congratulations, college Class of ’15. New government unemployment numbers make your decision to get a college degree look smart: Unemployment was 5.5 in February, a low number that looks especially good compared with unemployment rates above 9 percent in the recession. For college graduates, joblessness was even lower: 2.7 percent.
Here’s the next smart move to make: Have a strategy for using credit and growing your credit score.
Why worry about your credit score?
You’ve got a lot on your mind right now. Do you really need to bother pumping up your credit score?
You do. At the least put it fairly high on your list. Sadly, credit scores increasingly are used as a measure of our worth. Your score is supposed to measure the likelihood you’ll repay a loan. Credit card companies and lenders of every type check your score before lending money and deciding what to charge for loans.
A surprising number of others check credit scores, too, including utility companies, landlords, employers, government agencies and insurers, in deciding whom to do business with and what to charge. “In New York City, credit checks are even sometimes used to screen dog walkers and janitors,” writes The New York Times.
The lower your score, the more you pay for loans and insurance. You’ll be at a disadvantage with landlords in an already tight rental market. And if you plan to buy a home, you’ll be shut out or pay far more than your peers who have good credit. (This article explains how a 639 FICO score could cost you $70,000 more for a mortgage than it would if your score was 760.)
It can seem unfair, but people who manage money well get the best deals, helping them to save still more money.
Convinced yet? If you are, take these steps to help boost your credit:
1. Understand credit
Opening a couple credit card accounts and taking out a small, manageable loan can improve your credit score, assuming you make every payment on time. Spend a few minutes reading our quick primer on credit, 10 Ways to Improve Your Credit Score Fast, to learn how the system works.
You might be surprised by how credit works. For example, having no credit cards makes you appear, oddly, like a credit risk to the scoring system because it has no information to go on for assessing your creditworthiness.
Remember, too, that when you apply for credit, lenders look at other things besides your score, including any collections, bankruptcies, charge offs, court judgments against you and how long ago they happened.
2. Pay on time — every time
Nothing matters to your credit more than making every single payment on time. Your payment history accounts for a whopping 35 percent of your credit score, more than any other factor. (Here’s how FICO, the inventor of the credit score, explains what goes into its scoring).
To make sure you won’t forget:
- Set up automatic bill payments through your bank’s website. Put your vehicle loan, electric bill, mortgage or rent, cable service and the like all on auto-pay.
- Or, automate your payments by making arrangements with each creditor if you’d rather. You can do this on the company’s website, or call its office for help setting it up.
With credit card bills, your monthly balance can vary widely. If an unpredictable payment could throw off your bank account, set up calendar reminders for paying your credit card bills and make backup reminders so you’re covered in case you slip up.
3. Think before you borrow
When borrowing — and that includes shopping with credit cards — every dollar of interest you pay is a dollar you aren’t able to save or use for something you need or want. To stay alert with credit, think of it much as you do alcohol: It can be risky, so think about what you’re doing and plan your moves.
4. Use your head with credit cards
Credit cards are seductive yet necessary. Settling on a well-balanced relationship may at first require some time and experimentation. A few tips:
- Don’t use it just because it came in the mail. Limit the number of cards you have; investigate the benefits and costs of each and decide if it fits your needs.
- Stay in the driver’s seat. Shop for loans and credit cards: compare interest rates, annual fees and card features. (Money Talks News’ solutions center lets you comparison shop for credit cards.)
- Good habits allow freedom. If you (truly) pay off your card balance every month, you can focus your shopping on features like rewards and fees instead of focusing on rates.
5. Keep up those thrifty habits
If you got through school eating ramen and perfecting the cheap or free date, good for you. Don’t stop now.
When you have a job and a spending plan, you can budget for spending more in certain categories, including budgeting for regular planned splurges. But don’t stop budgeting and tracking your spending. The feeling of being flush can get you into trouble if it leads you to overspend or commit to too much debt.