Home > Credit Score > 12 Ways for College Grads to Build Credit

Comments 0 Comments

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% in the recession. For college graduates, joblessness was even lower: 2.7%.

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. 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, 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.

You might be surprised by how credit works. For example, it may seem counterintuitive, but having no credit cards makes you appear 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% 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:

  1. 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.
  2. 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.
  • 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.

6. Mix up your credit use

Using a mix of credit types is healthy for your score. There are two kinds of credit:

  • Open-end or revolving lines of credit: Credit cards, for example, which let you pay back a little or a lot, borrowing against a credit limit.
  • Closed-end or installment loans: Auto loans and mortgages are examples of installment loans, with fixed payment amounts and a fixed pay-off date.

Your mix is one factor used in calculating your credit score. It shows your ability to handle both cards and loans. Although it accounts for just 10% of your credit score, “having credit cards and installment loans with a good payment history will raise your FICO Scores,” says FICO.

7. Get credit for everything you do

Your credit score can get a nice boost even if you are not using credit cards because, as you know, on-time payments are gold when it comes to building a score. If you have a strong on-time payment record, ask your utility companies, cell phone provider and landlord to report your payments to the three major credit bureaus: Equifax, TransUnion and Experian.

8. Know how much is enough

While a mix of credit types helps your score, the amount matters more: It accounts for 30% of your credit score.

Also, make sure you are using just a fraction — less than 30% — of the amount you are eligible to borrow. With credit cards, that means using less than 30% of your credit limit on each and every card. For example:

  • If your credit limit is $250, borrow less than $83.
  • If your limit is $2,000, keep your borrowing to less than $666.

This sounds a little odd, admittedly (Why have the credit if you can’t use it?). Still, consuming just a small proportion of your available credit is a surefire way to pump up your score.

Also, apply for credit infrequently and carefully. Says FICO:

There is no magic number of applications that you should limit yourself to, but in general, the fewer the better. In fact our research has shown that people who apply for credit multiple times within a short time period tend to overextend themselves and are more likely to default at some point.

9. Watch your credit report

Errors on your credit report can damage your credit score, so it’s important to get a free credit report at least once a year from AnnualCreditReport.com.

Keeping an eye on what your creditors report to the three major credit agencies also lets you catch any fraud or identity theft, which can wreak havoc on your credit score. It also lets you catch and correct errors (they are not uncommon) reported by creditors.

10. Whittle your student loans

The bottom line of your student loan or loans can be daunting. But don’t let that stop you from chipping away at your loans until they’re gone.Your credit score will shine brighter as your loan balances diminish, showing you using less and less of your available credit.

11. Get the loan before car shopping

The chances are excellent that an auto dealer is not the cheapest source for your auto loan. With that in mind, find a loan with the lowest rates possible before walking onto a dealer’s lot or showroom, not after.

12. Start small

When you are establishing credit, use these starter moves:

  • Apply for a credit union credit card. It might be an easier place to get your first card than from a bank.
  • Use a secured card. Secured cards are a good way to practice using a credit card: You make a deposit that becomes your credit line. Yes, it’s your money, but remember to use only 30% — at most — of your credit line. Your goal is to build credit, remember? Secured cards come with advantages and disadvantages. The details count.
  • Ask if your performance is reported. Some secured cards report your payment track record to the big three credit reporting agencies, but others do not. Choose those that report.
  • Shop carefully for fees. Secured cards can be expensive, so pay careful attention to the deal you’re getting and do plenty of comparison shopping.
  • Get a card with a grace period. If your card has no grace period, it will be nearly impossible to avoid paying interest.

More From Money Talks News:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team