Congrats! You've earned your college degree. If you're like many recent graduates, you know that you need to build good credit, but may not be entirely sure why or how to start.
Here's the why: It's about more than getting credit cards. Landlords check credit ratings before they rent an apartment. Some employers check them, too. A poor or scanty credit history could mean you'll pay higher interest rates on everything from car loans to mortgages.
And here's the how, building credit step by step:
1. Build a $1,000 Emergency Fund.
How will that help you build credit? “It's the single most important thing to do to avoid credit problems,” insists Professor Wanda Foster, MBA, who teaches finance at Concordia University Chicago. What happens without one, Foster explains, is that if your car dies, or you need a root canal, you may be forced to charge a big amount that you can't easily repay on an entry-level salary. Boom: your credit is dinged right out of the gate. Melly Koehler started scraping an emergency fund together right after she graduated. “I got to about $700 when [I had to pay] a $600 vet bill. If it wasn't for the emergency fund I thought I didn't need, I don't know what I would have done.”
2. Seek credit.
“Once the emergency fund is in place, the next step is to apply for a credit card,” says Foster. One option Foster recommends is a secured credit card. You give the credit card issuer a deposit – it can sometimes be as small as $200 – so in case you don't pay, they have that money. You'll get a bill each month with the option to pay any amount between the minimum payment and the full balance.
3. Don't leave it in a drawer.
Whichever credit card option you wind up with, use it! “It won't help your credit if you don't have any payments to make,” notes Foster. You never want to charge more than you can realistically afford, but paying for a few small purchases each month will build up credit. For additional credit building tips, check out How to Help Build Credit.
4. See how you're doing.
As part of her class, Foster has students go to all three credit reporting agencies – Equifax, TransUnion, and Experian – and order their reports to see what's in them. Everyone can get one free report from each agency once a year. “And yes, I say, you need all three! They can be different, and you never know which one will be looked at,” adds Foster. The ins and outs of a credit score can be confusing, so check out this infographic to help you understand what goes into your credit score – and ways to maintain healthy credit: 10 Healthy Credit Tips.
5. Apply strategically.
It can be tempting to apply for multiple cards at once, thinking it can only increase your chances of getting approved. But it's a far better strategy to apply one at a time for cards you're fairly sure you'll be approved for. A rush of “hard inquiries,” as applications for credit are called, may harm your credit score.
For more in-depth information on how to establish—or re–establish—credit, read How to Build Credit When You Don't Have a Credit History.