How College Grads Should Build Their Credit Score


NEW YORK (TheStreet) — Recent college graduates should start building their credit as soon as they receive their degrees.

Many graduates are starting from scratch when it comes to building their credit score. A good credit score means consumers can receive a lower interest rate when it comes to obtaining loans to buy a car, get car insurance or hold credit cards.

Graduates who worked during college, obtained a credit card and paid their bills on time have a head start. Creditors look at your credit report to see if you have a history of being able to pay your bills on time.

Here are seven tips to help the 1.8 million graduates avoid any hurdles as they enter the workforce, rent apartments and purchase their first car, according to the National Center for Education Statistics.

Research Options

If you are obtaining your first credit card alone, your choices might be limited. One option is to ask your parents to co-sign on a low-limit credit card. Opening a secured credit card may also be a good choice, said Roy Nagy, director of USAA Secured Credit Cards, the San Antonio-based financial institution. Some companies have added benefits when you obtain a credit card from them. If you are approved for a secured card from USAA, you can also open a two-year variable rate CD, which allows you to earn interest while also building a positive credit history, he said.

Use Credit To Earn Credit

People who don’t have any credit cards are basically “credit invisible,” said Jeff Golding, CEO of WilliamPaid, a Chicago-based company that allows people to build credit through paying their rent online. “While they may have a good job, a solid income and pay all their bills on time, no one knows that.”

Since the CARD Act was passed in 2009, it placed strict limitations on marketing and issuing credit cards to young adults. Consumers who are younger than 21 must demonstrate their proof of income to be able to pay the debt incurred on card loans. Most people don’t know they need credit until they get rejected when they try to rent an apartment, buy a car or purchase renter’s or auto insurance.

“They are already behind the eight ball because they can’t prove to anyone that they are a low risk,” he said.

Not having a credit card means those consumers lack having a credit score since credit bureaus can not see a history of the consumer paying their debt on time.

“Not having a score can be worse than having a bad score,” Golding said. “If it is bad, the credit bureaus can see some history and get their arms around the risk. Otherwise, it’s like throwing a dart.”

Avoid going over your credit limits and try to maintain low balances by keeping it low at or below 25% of your total credit limit, said Nagy.

Know Your Score

Get in the habit of keeping an eye on your credit score, said Nagy. This will also help you spot fraudulent activity and reporting mistakes. Many credit card companies such as USAA will update your credit score for free or you can get a free report at once a year.

Limit Credit Or Loan Applications

Even though those offers from stores at the mall to apply for a credit card to receive a discount on your purchases are enticing, avoid applying for too many within a short period of time. Lenders perceive this as a consumer who is short of money and could face issues paying back the debt.

“Keep your number of applications at a minimum and only go for the opportunities that offer the best deal for you,” Nagy said.

Although you can get approved for many loans, having extra debt means another bill which may not be the best fit for your budget, said Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a Washington, D.C. non-profit organization.

“Establishing credit after college is an important step toward achieving larger financial goals such as financing the purchase of a car, but your first steps into the world of credit card debt should be carefully planned and kept within manageable limits,” he said. “Student loan debt looms large as a significant factor for most college graduates, so extra caution should be used in order to avoid additional debt that might complicate matters.”

Pay Down Credit Card Debt

If you already have some credit card debt, your first priority should be to pay it down after making student loan debt payments. There are few investments which can top the rate of return since paying off credit card debt at typical interest rates effectively makes an investment which returns 15% to 20% per year, said Kevin Gallegos, vice president of the Phoenix operations for Freedom Financial Network, a company which helps consumers resolve debt issues.

Pay In Full Every Month

Paying the charges on your credit card bill each month in full is crucial, especially for new graduates. Avoid charging more than you can pay off at the end of every billing cycle and attempt to live within your means, he said.

“Charging a small amount each month and paying it off in full and on time is a huge boost to your credit profile,” Gallegos said.

Pay Bills On Time

When you pay your bills on time, it will improve your credit score because this factor accounts for 35% of your credit score.

"For new grads without credit cards, a student loan or car loan helps build a credit history, as does paying every rent, phone, Internet and utility bills on time,” Gallegos said.

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