Students graduating from college have a lot coming at them: finding a job, finding a new place to live — and somehow finding a way to pay off those student loans.
One thing to add to the list — establishing good credit. While college prepares students for their future professions, many graduate without an understanding of finances in general and credit management skills in particular.
“Your credit score is your financial DNA,” says Melinda Opperman, senior vice president at Springboard, a nonprofit credit counseling and financial education foundation. “Next to finding a well-paid job, building an excellent credit score is one of the most important things you can do to enhance your long-term financial prospects.”
In today’s economy, good credit will open doors, but poor credit can close them. A bad credit record can affect your ability to get a job, a car loan or even a rental apartment, as not just lenders, but prospective employers and landlords often look at applicants’ credit records.
“Young adults can really fail as adults, if they do not have the basic framework to make good financial decisions,” Opperman says. “Understanding the essentials of credit management is key to avoid making mistakes that it could take years to overcome.”
When it comes to establishing a credit history, getting a credit card is usually one of the fastest and easiest ways to get started. But credit cards are a double-edged sword: They can help you develop credit quickly, but they can also hurt your credit faster than you can say “credit card debt.”
To help you on your way, here are seven credit mistakes to avoid when you graduate from college:
1) Going with the first credit card offer you come across: If you don’t already have a student credit card, start looking for a credit card. But don’t just go with the first offer that comes your way. Credit cards come with greatly varying terms.
If you like the idea of earning rewards or cash-back on purchases, rewards credit cards offer many attractive features. However, if you will be carrying a balance from time to time, avoid rewards cards, which typically charge high interest rates. Instead, a low-interest credit card may be your best option. Know what you’re looking for, and use online resources to compare credit cards before applying.
2) Ignoring the fine print: Ignoring the terms of the card can cost you a great deal of money over time. Look at the summary sheet of the terms and conditions for the card, and get familiar with key terms like the annual percentage rate (APR) on purchases, balances transfers and cash advances. Also check out penalty interest rates, late payment fees, cash advance fees and over-the-limit fees.
3) Forgetting to pay credit card bills on time. With many bills, paying a little late is no big deal. Not so with credit cards. First, you get slammed with a late payment fee, often as high as $35. Then, if you pay more than 30 days late or forget a payment altogether, your credit score can take a dive.
“There are so many factors with revolving credit that can hurt your score,” Opperman says. “You can forget that you made a purchase, you can forget that the bill arrived, you can forget to pay it on time. But to build good credit, you can’t afford those small slip-ups.”
4) Not planning ahead: Paying credit card bills can get tricky if you charged without keeping track of how much you will owe at the end of the month.
“Many credit card users don’t realize that they need to plan ahead and have the money set aside so they can pay the bill when it arrives at the end of the month,” Opperman says. “And then suddenly the bill arrives, and there’s no money to pay it.”
Keeping credit card balances low is another key component of building a good credit score. Keep a running log of credit card charges, or check credit card balances online at least once a week. Pay the balance off in full each month. If that’s not possible, never let the balance go above 30 percent of the credit limit.
5) Turning to credit cards to make ends meet: For college grads facing lots of new expenses and uncertain job prospects, it’s tempting to turn to credit cards to make ends meet. Don’t. Credit cards are a great way to build a credit history, but they are a lousy solution to financial problems. If used as such, credit cards often create a whole new set of problems from which it could take years to recover.
“Before you get ready for anything in your life, whether it’s interviewing for a job, getting a car, or getting a credit card, it’s important to build awareness and educate yourself about what you’re doing,” Opperman says. “Knowledge is power. Take advantage of all the great resources out there to read up on the basics of good credit management skills.”
7) Not having a rainy day fund: Don’t get caught off guard by an emergency. Medical bills and expensive car repairs can rapidly take you from treading water to drowning in debt. Set aside a small amount of money each month to pay bills in the event you’re unable to work or are unemployed for a while. Opperman recommends having at least three months of income set aside in a rainy day fund. If that’s not possible, set aside at least $1,000, which will cover the average emergency.
“Lots of things become an emergency, if you don’t have a rainy day fund,” says Opperman. “If the money is there, it’s not an emergency.”