How to Build Credit
You will quickly realize the importance of good credit when you graduate and enter the workforce. Student credit is generally very limited – student credit cards, small electric bills, etc. So how do you go from the small-time world of student credit to building a solid credit history? We’ve created a guide for new graduates that will help you learn the basic do’s and don’ts of building a good credit record. But first, let’s discuss why building credit should be important to you:
You need to build credit to rent, lease or own things.
Need to find a place to live? Your prospective landlord is going to want to run a credit report first. Need to lease or buy a car? The dealership or loan company isn’t going to give you a loan or a lease if you have no credit, or worse, if you have bad credit. Unless your mom and dad are willing to co-sign for everything you need in life, you need to establish a positive credit history so you can qualify for credit to buy these things on your own. It’s also easier to get approved for credit cards, utilities, cell phones and the other things you need when you have a good credit history.
You will pay less in interest if you have good credit.
So the dealership decides to give you a car loan, but your credit isn’t great. You need a vehicle to get to your job, so you accept some pretty awful loan terms. Lenders base loan fees and interest rates on your credit score and your credit history. If you have bad credit, or no credit at all, you might pay thousands more in interest and fees than if you had good credit. On your entry-level salary, that higher car payment is really going to hurt every month, leaving you less money to save or pay for your other bills.
Guide for Graduates: How to Build Credit
Ok, so we’ve established you need credit to pay for the things you need. Currently, you probably have a “thin” student credit file, with very little history. That means that you have few transactions in your credit history, and these transactions are relatively recent. Check your credit report for free once a year by going to AnnualCreditReport.com. You’ll want to review your credit report to see what your credit history looks like today and continue to track your improvements.
Here are some ways that you can begin to build a good credit record, and some things you should avoid doing because it will hurt your access to credit:
- Get Your Finances In Order
After checking your credit report, make sure you catch up on any late payments or delinquencies that might be hurting your credit. Once you bring your accounts current, you’ll want to create a monthly budget and stick to it so you don’t make any late payments again. If you want to build credit, you need to pay all your bills on time. You’ll also want to open checking and savings accounts if you haven’t already done so. Checking and savings accounts are viewed as a sign of stability, but don’t abuse your accounts by over drafting them.
- Make Your Payments On-Time
Again, we can’t stress enough how important it is to pay all of your obligations on time because it is one of the most important factors impacting your credit score. If you run into financial hardship or lose your job (or can’t find one), contact all of the companies you own money to before you fall behind. Student loans generally have deferment and forbearances that you can use to postpone your payments during difficult times. Remember, if your parents have co-signed your student loans or a car loan, and you fall behind on your payments, you are hurting their credit too!
- Build a Positive Credit History
As a new graduate, you may have student credit cards, student loans and possibly a car loan. Student credit cards, and other types of credit cards, are called “revolving accounts.” Personal loans, student loans, and auto loans are often called “installment loans.” You should develop a mix of both revolving accounts and installment loans. If you don’t already have revolving accounts, try applying for a credit card (secured) or store card. Make sure that the cards have reasonable interest rates and no fees before you apply. Apply for cards that will give you the most use long-term because cancelling credit cards can have a negative impact on your credit score.
- Use Your Credit Wisely
Another important factor impacting your credit score is how much of your available credit you use. Unfortunately, you will be penalized if you use a significant portion of your available credit (i.e. all of your credit cards are full). It’s good to use your revolving accounts regularly, but you want to be able to pay these off every month. If you do happen to make a large purchase on a credit card, make sure you have a plan to pay off the balance quickly.
- Check Your Credit Report Regularly
You can check your credit report for free once per year at AnnualCreditReport.com. There are also paid monitoring services that will alert you every time something happens related to your credit file. If you are concerned about identity theft or want to check your credit often, you might look into one of these paid services. Make sure you go through your credit report to make sure that everything is correct. If there are inconsistencies with your information, report that to the credit bureau immediately so that it doesn’t negatively impact your score.
- Be Patient
It takes time to build a good credit history, but you should be able to watch your credit score improve once you begin to establish and use your credit responsibly.