Hey there, college grad. Before you go charging off to a brilliant career, here’s one last lesson for you to ace. Welcome to Credit for Grads 101. Starting off with an understanding of where your credit stands and where it is used can help you get ahead in the future. Making smart credit decisions now helps to ensure that you’ll get the best rates on major purchases, like a home or car, a few years down the road.
With this quick and easy guide, you’ll learn everything you need to know about credit as you make the leap to the real world, including some basics about credit scores and how to apply for a credit card.
What’s a Good Credit Score for College Students?
What’s the big deal about your credit score? This three-digit score determines the rates you pay on everything from credit cards to mortgages to auto insurance. A credit score is a numerical evaluation of the credit data found in a credit report (more on credit reports in the next section). Banks, lenders, creditors, and insurers use credit scores when evaluating potential customers and setting terms and rates.
When it comes to good credit, the basic rules of thumb apply to all demographics. While there are lots of different credit scores out there, most credit scoring models design their algorithms around five major factors: payment history, credit utilization, credit age, credit mix and credit inquiries. (You can learn more about what’s in a credit score here.)
Moreover, credit scores typically range from 300-850 with any score of 700 or higher considered “good” in most cases. A good credit score will help you to land lower rates on loans and insurance. The higher your credit score, the better the deals you will receive.
As a recent graduate, you may have what’s known as a thin credit file — or no credit score at all. But don’t worry: You can start to build good credit by making on-time payments on your student loans or by applying for a starter credit card (more on this, too, below.)
Credit scores can change every time something on your credit reports change. Late payments, high debt balances, and excessive applications for new credit can all lower your score. You can check two of your credit scores every 14 days using Credit.com’s free credit report snapshot. This completely free tool will break down your credit score into sections and give you a grade for each. You’ll see, for example, how your payment history, debt and other factors affect your score, and you’ll get recommendations for steps you may want to consider to address problems. In addition, you’ll also find credit offers from lenders who may be willing to offer you credit. Checking your own credit reports and scores does not affect your credit score in any way.
What Is a Credit Report?
In your credit report, you’ll find detailed records of your credit and loan accounts as well as public records, collection records, your employment history, and even current and former addresses. Everyone from landlords to employers to utility companies may scrutinize your credit. And that’s why it’s essential that your credit report is as clean and error-free as possible.
Each of the three national credit bureaus, Equifax, Experian and TransUnion, has its own distinct credit report about you. You want to make sure that each report is as accurate as possible. It’s up to you to correct any errors. Ready for some good news? How do three freebie credit reports a year sound? Thanks to the Fair and Accurate Credit Transactions Act, you’re entitled to a free copy of your credit report from each of the three major credit bureaus every 12 months. For step-by-step advice for ordering a free copy of your credit report from each of the three major credit bureaus, check out this article about free annual credit reports.
Once you get your hands on your freebie credit report, you’ll want to study it carefully and make note of any errors. You need to send a dispute request to the credit bureau to get an error removed or to make a correction.
The credit bureaus generally have 30 days to investigate your dispute after they receive your letter. (Some disputes can take up to 45 days.) If they can confirm that the information is inaccurate, they will remove it and send you a letter with an updated report. If they can’t confirm the correction, they will send you a letter of explanation.
How Can I Get a Credit Card?
Thanks to the CARD Act of 2009, issuers are prohibited from giving credit cards to anyone under 21 who doesn’t have a willing co-signer or can’t demonstrate their ability to repay their purchases as agreed. As such, while you may now be over that age threshold, there’s a good chance you haven’t applied for your own credit card before.
But here’s some good news: Credit card companies want you. They really, really want you. They want to land you as a student customer and hang on to you as your career and income go up and up and up. That’s why there are lots of credit cards geared specifically to students — and, if you were an authorized user on your parent’s account or were using your own card responsibly while in school, you may even be able to qualify for a premium rewards credit card.
If your credit is still too thin, don’t fret: You can look into secured credit cards to get in the game. Secured credit cards require you to put down a deposit that serves as your credit line, but, if you make on-time payments, you may be able to upgrade to an unsecured credit card within a year. You can go here to learn everything you need to know about secured credit cards.
Keep in mind that credit card companies will continue to monitor your credit record long after they’ve landed you as customer. And they could choose to adjust the interest rate on your card and other terms at any time, though they will have to provide 45-days notice before certain terms, like your annual percentage rates, go up. In any event, it’s important to read your card statements carefully each month or, even, each week.
How Will My Student Loans Affect My Finances?
Your credit record will not impact the interest rates that you pay on your federal student loans, since they do not require credit checks (neither do federal consolidation loans). Private loans do require credit checks. So you may end up paying a higher interest rate on a private loan if you have only average credit.
Paying your student loan on time every month is a great way to build up a strong payment history on your credit report. And how you choose to pay your loan could save you some cash.
You may be able to nudge down the interest rate on your student loan by agreeing to pay your loans online or by allowing payments to be automatically deducted each month from your checking account. Be sure to ask your lender about these money-saving options.
Are multiple student loan payments stressing you out? You may want to consider a consolidation loan. When you consolidate student loans, the debts are combined into a new loan with a longer repayment period. And that means a lower monthly payment each month.
If you find yourself struggling to meet your student loan payments because of unemployment or economic hardship, be sure to contact your lender and ask about options to temporarily postpone or reduce your payments.
How Can I Get an Auto Loan?
You probably already know that your credit affects the interest rate you pay on an auto loan. Having said that, you can get an auto loan with bad credit. And, if you have a credit score of 750 or higher, you have a good chance of landing the lowest rates available on one.
Be sure to shop around for financing before you shop for the car. That way a dealer will have to earn your financing business by beating the best interest rate you’ve found on your own.
Not sure where to shop for loan? Start here or with your bank or credit union. Once you find the best deal, apply for the loan and bring the financial paperwork with you to the auto dealer. If the dealer wants your financing business, he’ll have to offer you an awfully good deal.
If you’re interested in a new car, be sure to mention that you are a new college graduate. Most auto manufacturers offer special incentives for college grads, including special financing rates, delayed first payment, and cash rebates (typically around $500).
Credit Plays a Big Role in Your Post-Graduate Life
You probably already knew that credit could help or hurt your chances of getting a credit card, auto loan or mortgage. But lenders aren’t the only ones pulling your credit. Here’s a list of other people interested in your credit profile. (Note: Many of them play a big role in your post-graduate life.)
- Auto Insurance: Does having good credit make you a better driver? Insurance companies think so. More than 90% of auto insurance companies use credit data when determining insurance rates and terms for customers. The better your credit, the lower your auto insurance rates are likely to be. That’s all the more reason to keep your credit record as shiny and blemish-free as possible.
- Employers: With your permission, potential employers may review your credit report when you apply for a job. Employers are looking to see that you are responsible about handling your financial obligations. They also are looking for any major negative records and any discrepancies. If an employer decides to take “adverse action” based on information in your credit report, the company must notify you first and provide you with a copy of your credit report.
- Landlords: Landlords and rental agencies often pull a copy of your credit report as a part of their review process. They figure that if you’re responsible with your credit then you’ll be responsible in their apartment and in making your rent payments. They also may check to see that the employer listed in a credit report matches the employer that you listed on your rental application. They are also looking for any major negative records. If you have credit problems, you could be turned down as tenant, be asked to make a higher deposit, or be asked to pay higher rent.
- Utility Providers: Believe it or not, your credit could affect your light bill. With your permission, electricity, cable, and other utility companies may check your credit report when determining your rates. If you have credit problems, you may have to put down a deposit, add a co-signer, or pay higher rates for your utilities.
- Cell Phone Providers: And finally, your credit can even affect your cell phone bill. Cell phone companies check your credit score before granting you a service contract. If you’ve got banged-up credit, you may have to pay extra for a service plan or put down a big down payment. And some cell phone contracts allow the company to review customer credit.