Credit-Building Tips for College Grads
You’ve spent years taking classes, studying for exams, and gaining practical experience to help prepare you to enter the workforce when you graduate. But are you prepared for the financial realities that await you?
Getting a job and earning a paycheck is only one part of what it takes to be financially healthy. Another important component is establishing a solid credit history.
Unless you’re sitting on a boatload of cash, chances are you’ll need credit at some point in your life, and a strong credit history may help you get it. Before a lender approves a credit application, they’ll want to see how you’ve used credit in the past as an indicator of how likely you are to repay your bills.
If you can show you’ve used credit responsibly, they’re likely to view you as a lower-risk applicant and approve your application. And lenders typically grant more competitive interest rates and more favorable terms to borrowers with higher credit scores.
Not sure how to get started building your credit? Read on.
5 Strategies to Help You Establish Credit
It’s a catch 22 that many new borrowers face: Lenders want to lend to consumers who have a track record of repaying their loans on time, but how are you supposed to create a credit history of on-time payments if you don’t have any credit?
Fortunately, there are multiple ways to help build a strong credit history even if you’re just getting started—or improve a battered one if you’ve made some poor financial decisions during your college career. Here are five of them:
1. Repay your student loans. If you’re one of the many students graduating with debt, your payment behavior will be reported to the credit reporting agencies. Repaying your loan on time can help you to build a positive credit history.
2. Get a credit card. This may be easier said than done, at least when it comes to a major credit card. However, credit card issuers typically offer two types of cards designed to help people with little or no credit—secured credit cards and student credit cards, which are often available to recent grads as well as current students. Another option may be a store credit card, as store credit cards typically have lower credit score requirements than major credit cards.
3. Apply for a credit-builder loan. Credit-builder loans are just like they sound. They’re loans designed to help people who have little or no credit history establish one. Because these types of loans require a cash deposit to secure them, they’re typically easier to get than unsecured loans.
4. Become an authorized user on someone else’s credit card. Many credit card issuers report all activity on the account to the credit reporting agencies for both the primary account holder and the authorized user. But be careful whose account you become an authorized user on. This strategy could help you establish a positive credit history if the primary account holder is using their card responsibly. But if they’re maxing out the card each month and skipping payments or making payments late, it will likely have a negative impact on your credit.
5. Get a co-signed loan. Can’t qualify for a loan on your own? Consider asking your parents or someone else you trust to co-sign it with you. Having a co-signer may improve your chances of qualifying for a loan. And if you qualify, activity on the loan will be reported to the credit reporting agencies for both you and the cosigner.
4 Ways to Use Credit Wisely
Establishing a strong credit history isn’t just about opening new accounts to get trade lines on your credit reports. It’s also important to use the credit available to you wisely. Otherwise, it could cause more harm than good.
Here are four tips to help you manage your credit accounts responsibly.
1. Pay your bills on time. Your bill-paying history has the biggest impact on your credit scores. In general, making your payments on time positively affects your scores, while paying late negatively affects your scores.
2. Use credit sparingly. Your credit utilization ratio measures the total amount of revolving credit you use against the total amount of your credit lines. For example, if you have two credit cards and the sum of their credit limits is $5,000, while the sum of your outstanding balances is $500, your credit utilization ratio is 5,000 ÷ 500, which is 10%. Experts recommend keeping your ratio below 30%.
3. Don’t open too many new accounts at once. How often you apply for credit and the number of new accounts you’ve opened recently are factored into your credit scores. If you open multiple accounts within a short period of time, it could negatively affect your scores.
4. Consider keeping older accounts open. Credit scoring models include how long you’ve been using credit into their calculations. The longer your credit history, the better. If you close older accounts, even if you’re not actively using them, it could negatively affect your scores.
Building a solid credit history won’t happen overnight. But with time and patience, it’s possible to establish habits that demonstrate you pose a lower credit risk to lenders. As you’re extended more and more credit—and use that credit responsibly—you should become more attractive to other lenders and hopefully be able to get all the credit you need.