9 credit steps to take before graduation
By Allie Johnson
April 4, 2016
If you’re about to graduate from college, you might be ready to put away the books, but there’s one more thing you should study up on: credit.
Your credit history and score will play a big part in your life when you enter the post-graduate world. So it’s smart to learn about credit now and, if you haven’t already, start building a credit history.
Here are nine credit steps you should take before walking up to get your diploma:
1. Give your credit an exam. “The biggest obstacle for new graduates is they don’t have a long credit history, if they have any,” says Cristina Guglielmetti, a certified financial planner and president of Future Perfect Planning in New York. You can check your credit history with all three major credit bureaus for free at AnnualCreditReport.com. You can see if you have a credit history and, if you do, check for mistakes and possible identity fraud, such as someone else getting credit in your name. “You can make sure there are no surprises later,” says Pam Horack, a fee-only financial planner who goes by “Your Financial Mom.”
2. Correct any errors. An error on your credit could be as simple as a misspelling of your name or as complicated as an account that’s not yours. This can happen for innocent reasons, such as if you have a relative with a similar name. Or, it could be a sign of fraud. If there are any errors on your credit report, you can file a dispute with one of the credit bureaus (TransUnion, Experian and Equifax) to get the problem corrected. The credit bureau you file a complaint with will notify the others. The Federal Trade Commission offers a guide to disputing an error. In short, you explain the error in writing, online or by letter, and the credit bureau investigates and makes necessary corrections.
3. Begin building credit. In the past, many college students graduated with loads of credit card debt. The Credit CARD Act of 2009 aimed to change that by requiring applicants to show proof of income to get a credit card. The downside is that some grads now enter the working world with no credit history. One easy way to start building credit is to get your mom or dad to add you as an authorized user to one of their credit cards. Make sure it’s a card that has been open for several years, on which they don’t carry a balance and have always paid the bill on time. That account and its history will start showing up on your credit reports. In this way, “you can piggyback on their credit,” Guglielmetti says.
“The biggest obstacle for new graduates is they don’t have a long credit history, if they have any.”
— Cristina Guglielmetti,
Future Perfect Planning
4. Get your own plastic. If you have a job or you’re 21 or older, you may be able to get a credit card of your own. If you can’t qualify for a traditional credit card due to an extremely low credit score or thin credit file, consider getting a secured card, in which you put down a deposit or use a savings account to secure the card, then get a credit limit in that amount. If you use the secured card responsibly for several months, you should soon qualify for a traditional card, Guglielmetti says. “Get yourself a card as soon as you can,” says Thomas Miller, professor of finance and Jack R. Lee Chair of Financial Institutions and Consumer Finance at Mississippi State University. A card issuer may start you with a low credit limit then bump it up quickly, he says. One of his students began using a card with a $500 limit and paid the bill in full each month. Within a few months, the limit went up to $2,000, he says. “He played by the rules, and his credit limit was quadrupled,” Miller says.
5. Use credit wisely. Charge small items regularly, and pay the bill in full each month. One way to avoid racking up a balance is to use your card only for expenses such as textbooks or cafeteria meal plans, for which you already have the money or will get reimbursed by your parents. Resist temptation to charge “fun” stuff you can’t afford, such as a spring break trip with your friends. Also avoid charging stuff, such as pizzas and lattes, because it’s too easy to rack up debt, says David Levy, editor of Edvisors, a site that provides advice, information and tools on paying for college. “The key is to look at the card as a tool rather than free money,” Guglielmetti says.
6. Start keeping score. Once you’ve established credit — that is, you’ve had one card account open for six months — you’ll get a FICO score. FICO scores range from 300 (poor) to 850 (excellent) and are used by lenders and credit card issuers to determine your credit risk and how much to charge in interest. The higher your FICO score, the better the terms you are likely to get. This chart from FICO shows that payment history makes up the largest share (35 percent) of your score, so always pay your bills on time. Amounts owed make up 30 percent of your score, which is one reason to avoid carrying a balance on your card. Since many card issuers now offer free FICO scores on monthly statements, this is a great way to keep tabs on your credit score, Miller says.
7. Study credit traps. As you advance in your credit education, learn how to steer clear of common traps. If you’re thinking about adding a rewards card with a sweet sign-up bonus of points, miles or cash back, make sure you will spend the required amount to get that bonus and pay your monthly bill in full and on time. If you don’t pay on time, that sign-up bonus will slip through your fingers. And though many credit experts recommend retail cards because they are easier to get for someone new to credit, store cards tend to have sky-high interest rates if you carry a balance. When you’re new to credit, just start with one card so you can easily see how much you owe at any time, Guglielmetti says. “Having one card keeps you honest,” she says.
8. Get a jump on student loan repayment. Before you graduate, make a list of any student loans you may have and the total amount you owe, Levy says. Many students put off facing their student debt because they know they’ll get a grace period of six to nine months on federal loans, depending on the loan, he says. But planning ahead will help you prepare for repayment, which will play a big part in helping you build good credit, as long as you pay on time. Late payments can really drag down your credit score fast. So know what you owe ahead of time, look at repayment plan options and what you’d be required to pay with each one, and start building an emergency fund to help ensure you never miss a payment, Levy says.
9. Get ready for credit checks. Know that your credit history and score will play a big part in your adult life. If you need to borrow to buy a car to get to your new job, the lender will check your credit, which will determine whether you get a loan and how much you pay in interest. If you apply to rent an apartment, the landlord probably will conduct a credit check. If you have no credit, you might need a co-signer, Guglielmetti says. “There’s a lot you won’t be able to do in your own name,” she says, unless you have a decent credit score.
You have a lifetime to learn about money, but a crash course in credit before you don your cap and gown will help you make an easier transition to life after college.