5 credit tips for new college grads
Congratulations! You made it through college armed with a degree, and hopefully a job. Now it's time to move on to the next stage of your education: life. The tests are all open book, the deadlines are varied, and some lessons are much harder and carry higher stakes than others do. Worst of all – there is very little grading on the curve.
One of your first post-graduate lessons should be on the proper use of credit. Poor early decisions regarding credit can have adverse effects for years. In the words of millennial money expert Stefanie O'Connell, "It's really important for millennials to understand what a critical role credit plays in your life ... it's critical at every life phase."
To begin your credit education, we offer these five tips:
1. Set Up a Credit Plan – You should not avoid credit. Potential creditors will look for evidence that you manage debts well, and when gauging risk, having no history is almost as bad as having a poor history. Use a credit plan to carefully build a positive credit history and a good credit score, which Adam Carroll, Founder and Chief Education Officer of National Financial Educators, calls "hugely important when it comes to making major life decisions."
Start by thinking about how many credit cards you really need, and when you plan to use them. Stick to one or two cards such as a gas station card and/or a starter credit card (with terms designed for limited credit). Verify that all cards report account activity to the credit bureaus. Make small purchases with these cards and pay them off monthly without burdening your budget. Using this method, you can build a solid credit history in a short time and qualify for better terms.
2. Research Your Choices – There's more to choosing a credit card than seeking the best interest rate. A wide variety of cards are available that cater to individual markets. Online comparisons and reviews are available to help you assess the positives and negatives of each card. Seek the card that best matches your preferences and perks.
If you take advantage of introductory offers, make sure that you fully understand how things change after the introductory period expires (such as the effect on interest rates and repayment terms), and what actions you might take that would void your great deal. For example, a single missed payment could trigger a high penalty interest rate.
3. Always Pay Bills on Time – You don't have to pay your credit card bill in full each month – although if you can, you should, to avoid interest charges – but you should always pay at least the minimum payment amount on time, without fail. Payment history accounts for a large portion of your credit score, and missed payments count against your credit score for a long time. Payments that are late by at least 90 days stay on your credit report for 7 years. Multiple missed payments compound the effect.
Don't forget other debts like utility bills, phone/cable/Internet bills, and even student loans. Missing payments on any regularly scheduled bill or installment loan will also damage your credit score.
4. Don’t Max Out Your Credit – If you spend near your credit limits, your credit score will suffer even if you pay the bill off in full every month. Lenders look at credit utilization, the amount of credit you use as a percentage of your credit limit, to assess the risk involved in lending you money. Credit utilization accounts for another large chunk of your credit score.
With a limited credit history and being near your credit limit, lenders assume a few unplanned expenses could push you over the edge. Try to keep your balance below 30% of your credit limit at all times.
5. Create a Budget – As a new graduate, you are likely to have significant student loan debt and probably not enough income to cover all your spending wants. It's too easy to use credit cards as a crutch to prevent hard budgeting decisions.
Lay out a realistic budget for the upcoming year that incorporates all your regular payments and new expenses that you are likely to require as you start your post-graduate life. Rent, furniture, insurance, new work-related expenses, taxes ... it's easy to lose track of your cash flow and fall back on credit to handle mistakes. Ask friends and recent graduates for help if necessary. Mom and Dad may also be happy to help you lay out a sample budget. (They were young once, too.)
You're off to a great start! It's time to venture out into the real world and test your credit knowledge, but feel free to use all your available resources for help at any time. Continuous learning usually leads to the best decisions, in credit or any other aspect of life.