7 ways college grads can boost their credit
To achieve good credit, recent graduates need to make smart moves.
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Hey, college grad, it’s time to talk about credit! Your bright future involves getting, managing, and maintaining good credit—it’s how lenders and landlords judge how responsible you’ll be at paying off loans and credit card balances or making rent. Want to impress a landlord or a future boss? Good credit will do that. Want to get approved for a good rate on a car loan or home loan? You’ll need good credit for that. You’ll even need good credit when you sign up for utilities for a new apartment. If your credit is banged up, you may not get approved or be hit with fees.
Ready to learn how to get good credit? Follow these seven important tips.
1. Get a handle on your student loans
For most grads, loans will be a big part of your financial life and may be a big part of your stress about the future. How will you make all those student loans payments? Gather together all your loan information and add up the payment amounts to determine the total you’ll be paying back each month, starting six months after you graduate. Typically, this amount will cover the interest you owe as well.
But watch for announcements from the U.S. Department of Education. Thanks to COVID-19, federal student loan payments were paused through August 31, 2022. This meant that loan payments were suspended and a 0% rate was applied to the loans, so they wouldn’t continue to accrue interest. And while that may not make a difference if you just graduated or are about to, there’s always a possibility for those provisions to be extended.
Thirty percent of undergraduate college students borrow money from the federal government and the amount they borrow accounts for almost 93% of student loan debt. With a federal student loan, you have plenty of repayment options. If a standard 10-year repayment plan doesn’t work for you because your total loan payment exceeds your income, you can request an income-based repayment plan or a graduated repayment plan, which starts with lower payments that increase every two years. If you’re experiencing tough financial times, you may request a forbearance or deferment on your federal student loan, which will postpone or lower your loan payments for a period of time.
Whenever your student loan payments begin, you’ll want to make room in your monthly budget for them. Paying student loans on time each month is a great way to build your payment history and boost your credit.
2. Create a budget
Now that you know what you’ll be paying back in loans, you can make a budget to determine what you can afford when it comes to other expenses, says Trent Graham, a financial wellness expert at GreenPath Financial Wellness, a national nonprofit. A huge part of having good credit is not going into debt in the first place, especially in the form of credit card bills from spending more than you can pay off in a timely fashion.
With a budget, you’ll want to include income such as paychecks and compare it against all your bills and expenses like housing, transportation, utilities, food and insurance such as car insurance and renters insurance. “Make sure [you] have basics covered first,” Graham says. Then you’ll know what you can spend for fun. Not sure how to start? Using good budgeting app can ensure you don't miss anything.
3. Don't apply for too many credit cards
If you don't have any credit cards yet, it may be tempting to blanket the financial world with your applications, so you hopefully get approved for something. But don't do this—having too many applications and too many lines of credit at once can ding your credit score.
Instead, shop smart for your next credit card. Not sure where to start? Consider these best first credit cards.
4. Use credit cards carefully and pay them off quickly
A good rule of thumb is simply not to spend money you can't pay back every month. Credit cards are a handy way to pay as long as you pay the balance in full every month, you won’t acquire any big interest charges. Paying even the smallest credit card bills, say for a monthly streaming service, will help you build up a solid payment history, as long as you pay your bills on time.
But avoid using credit cards to add to a meager, post-grad income. Debt can add up fast when you aren’t able to pay the balance in full. “Using credit cards to supplement income can lead to trouble,” Graham says. “If you get in that trap, it’s hard to get out of it unless you make more income.”
5. Pay more than the minimum payment if you can
If you need to put some expenses on cards, be mindful of how much of a balance you will carry and the interest charges. Pay down a credit card balance as quickly as possible.
A balance with a high interest rate can be tough to tackle, but paying beyond the minimum payment makes a big difference. Becky House, director of strategic initiatives at American Financial Solutions, a non-profit credit counseling, financial education and debt consolidation agency, shows how even small payment changes matter.
For example, on a $5,000 debt with an 18% interest rate, someone making only minimum payments will take over 13 years to pay the debt off. How could this be? As the credit card balance gets smaller, so will the card’s minimum payments, which are set at 3.5% of the balance that remains. So by only paying the (ever reducing) minimum, it will take well over a decade to get to a zero balance. But if the borrower held steady and kept paying the value of the first minimum payment, or $175 every month, the card would be paid off in just 3 years and 2 months.
Bottom line: Try to pay more than a card’s minimum payment whenever you can and the full balance whenever possible. “If it isn’t possible to pay the entire balance, pay it down as close to 25% or 30% of the available credit limit as you can,” House says.
6. Don’t skip a credit card payment—and don’t close open accounts
It goes without saying, but letting bills default is not going to do your credit score any favors. “Pay all of your bills on time,” House says. “Just one late payment can have a dramatic impact on a credit score and the credit report.”
Worried about missing a payment? Signing up for automatic payments is a great way to go. Set the payment date after a payday so there will be lots of cash in your checking account.
Also, keep all your credit cards open, even if you are not using them right now. The length of your credit history impacts your credit score and that old credit card account from a few years ago will help your credit by adding to your credit history.
7. Get to know your credit report
Want to see who you owe and what you owe? Get a free copy of your credit report. You’ll see every student loan you have and every credit card and other credit account you may have such as a car loan. You’ll see how much you owe and if the account has been paid on time. It is a good idea to review your credit report at least once a year.
“Coming out of college is a great time to review the report and ensure that any student loans someone has are reporting correctly,” House says. “Take the time to review all aspects of the report, personal information, other credit information, inquiries, who is looking at the report, and make sure it is all correct. Everyone can access a free copy of their credit report at annualcreditreport.com.
Review your credit report carefully. If you find errors, reach out to the credit reporting agency and request that they be corrected. This is especially important if another person’s credit records have gotten mixed with yours, which can happen for folks with similar names and even relatives. Promptly alert the credit reporting agency of this error. You want to make sure your credit report is accurate and only lists your own credit records.
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