So, in a few weeks, you will graduate from college — congratulations and welcome to the real world! Soon, you’ll begin your adult financial life. And to get off on the right foot, you’ll want to begin building credit as soon as possible.
Good credit is the cornerstone of sound finances. A top credit score can help you get the best terms on a loan.
Following are some key ways college grads — or anyone else — can build great credit.
1. Think before you borrow
When you were living on campus, you were always poor, hungry and looking for free food. So, once you land a job, there’s a big temptation to indulge yourself. After all, you’re a grown-up now, right?
Better idea: Maintain the thrifty habits you learned in college. One of the weird secrets to good credit is to have a lot available but to use little. (More on how that works in a minute.) But the main lesson here is that every dollar of interest you pay — for example, on credit cards — is one less dollar you have. Keep and invest those dollars.
2. Don’t overdo it
Why does using your credit only sparingly help your credit score? A big part of your score is your “utilization ratio” — how much you owe relative to how much you’re approved to borrow.
The sweet spot is at about 30 percent. So, if you have a credit card with a $1,000 limit, try to keep your balance below $300.
3. Know what impacts your score
There are a lot of misconceptions about how credit scores work. We already mentioned that your utilization ratio — essentially, the amount you owe — impacts your score. Here are the components considered in tallying your Fico score, the most important credit score:
- 35 percent: payment history
- 30 percent: amount owed
- 15 percent: length of credit history
- 10 percent: new credit
- 10 percent: credit mix
Young college grads are handicapped on the first component because they don’t have a lot of accounts that have been paid responsibly. They are also hurt by the third component because they don’t have a long credit history. But those will take care of themselves over time when everything else is done right.
We already discussed “amount owed” in the second point. “New credit” refers to applications for credit — regularly applying for new credit makes lenders think you might be desperate or bad at managing money. It’s best to make multiple credit inquiries within a small window, and to keep applications to a minimum.
Finally, you want to have the right mix of credit accounts, so lenders can see you’re well-rounded and can manage different kinds of credit. According to myFico:
FICO Scores will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. It’s not necessary to have one of each, and it’s not a good idea to open credit accounts you don’t intend to use.
4. Know your options
Here’s a “Catch-22” situation: How can you build credit if you can’t get credit?
If you are struggling to get a lender to issue you credit, you still have options. One is to join a credit union, which is like a bank but can be more flexible about lending.
Another route is a secured credit card — easy to get because you deposit money in an account to guarantee the credit line. But before you apply for a secured credit card, make sure your lender will report your payments to the three major credit-reporting agencies — Equifax, Experian and TransUnion.
5. Be punctual
Making your payments on time is crucial to keeping your score high. The best way to make sure your payments are always on time is to schedule or automate them.
Then, budget well and start building an emergency fund of three to six months’ of living expenses. You can’t avoid unexpected expenses, but you can prepare for them.
Ready to hunt for new credit? Check out our credit card search tool.
Do you have tips for building credit? Share them in comments below or on our Facebook page.