How to Build Your Credit Score
As the month of June winds down and graduation parties conclude, the promise of “summer fun” and time off appeals to many of us. However, recent college graduates, whether they are headed into graduate school into new jobs, have an entirely new world to navigate that includes more than the bright summer sun.
Collectively, recent college graduates have a massive burden in the form of mounting student debts. The average student graduates with nearly $30,000 worth of loans and many also carry some credit card debt as well. This, coupled with the burden of adjusting to life (and expenses) in the real world means that, perhaps for the first time in their lives, these young twenty-somethings must take control of their finances with an eye towards the future. This means considering purchases, and creating a budget with their long term financial goals and the outlook of their career fields and aspirations in mind.
One important step in that process is building credit in a responsible way. Assuming that most college grads have at least some debt, whether it be student loans, car loans, credit card debt or some combination of these, properly managing their finances into the future means both avoiding the accumulation of more debt as well as setting themselves up for large future purchases such as new car or a home. Establishing good spending habits and saving money is important, but so, too, is working to consciously build credit through simple steps and good habits.
1. Open a Bank Account
Although checking and savings accounts don’t count towards one’s credit per se, many times lenders require you to have one or both in order to apply for a loan. Aside from the obvious benefits of direct depositing paychecks and managing your savings, many banks’ checking accounts come with online programs that allow customers to manage their finances easily. They can make automatic savings deposits and setup bills to go out automatically, on time, and directly from their account, which helps to prevent late fees.
2. Get Different Types of Credit
While too much credit and irresponsible use thereof is at the heart of many people’s financial woes, the truth of the matter is that we live in a credit-reliant society. Unless you plan to buy everything, including a home and car, with cash, maintaining diverse lines of credit is essential. Most lenders look for a “thick file” when they processes applications. This means several lines of credit which borrowers use responsibly and promptly repay. A student loan is one type of loan that many recent grads already have to consider. Other good entry-level ideas include store or gas station credit cards with low credit lines and small (used) car loans.
3. Manage When You Apply for Credit
While it’s tempting to use a new salary level to apply for a bunch of different types of credit, including new, higher line credit cards, large vehicles, and more, applying for a lot of credit in a short period of time is a big no-no. In fact, applying for multiple lines of credit at once may signal to future lenders that you were cash poor and therefore in need of credit, rather than trying to establish good habits.
5. Consider a Small Loan
Though it may seem counterintuitive, borrowing money in the form of a personal loan, which you then faithfully repay, is a good way to establish good credit practices and increase your score. This is an especially good idea for recent grads without student loans who may need something more substantial than a credit card on their file but who may not want to commit to a larger loan such as a car loan.
**What steps did you take to establish your credit as a young person or recent college grad?**