You've graduated and are now a member of the real world. Congratulations! Welcome to the land of credit, debt, and personal financial responsibility. But what exactly is credit? How do you earn it? Is it even that important?
No more pencils, no more books . . . no more Mom and Dad paying your bills. Life after college can be a rude awakening, especially nowadays when students are graduating with more debt than ever before. In order to take responsibility, you have to gain an understanding of what sort of state your finances are in. Once you’ve done that, try to stay calm. What follows is a quick guide of the basics you need to know about credit and how to use it to your advantage.
What’s the big deal about credit anyways?
“Credit History is something that will follow you though your entire life,” says Becky Palmer, Director of Education at Consumer Credit Counseling Service of New Hampshire and Vermont. The major fact you need to keep in mind when dealing with credit is that it’s the gauge others use to measure what sort of risk you are when doing everything from borrowing money to renting an apartment. The information contained in your credit report is used to determine if you are trustworthy, and your credit report and score will be big factors in almost every major financial decision you make. Landlords, cell phone companies, and even your future employer can sneak a peek at your credit history (or credit report), so you should too.
Don’t know your history?
It’s time to find out. With the passing of the Fair and Accurate Credit Transactions Act, you are entitled to three credit reports per year, one from each of the major credit bureaus: Equifax, Experian, and TransUnion. You can space these reports out over the span of a year to keep track of your credit. Not only will you be prepared when facing your future landlord, but you will also have the chance to check for any errors on your report—which there often are—and protect yourself against identity theft.
You can check your report simply by going online. Don’t go to a credit bureau’s website. They will ask you to sign up for services that you will eventually have to opt out of or pay a monthly fee for. The better route is to go to www.AnnualCreditReport.com. You’ll have to fill out some verification questions, so try to have some identification ready and letters from your lenders at hand, or better yet, set up online accounts with your lenders so you can check your history and manage your loans easily. Once you’ve got access to your report, you’ll have 30 days to print it or view it online. Make sure you check for any possible errors and report them to the credit company at once. For a student-friendly guide to credit scores and the like, check out FindTuition.com's in-depth advice here.
So what about credit scores? These are important as well because many businesses won’t even look at your credit report, they judge by the score alone. Credit scores are not free like your credit report and vary in price from $5.95 to $7.95 depending on the credit bureau you use. Credit scores can range anywhere from 300 to 850, and the higher your score, the better. A good credit score is anything above 700.
Credit scores are determined by the Fair Isaac Corporation and are often called a FICO score. They are based on bill payments, amount of money you owe, the length of your credit history, and the variety of your credit. There are many activities that affect your credit score negatively. A late payment on a bill is one of the most common offenses, and it can really drop your score. So, remember this mantra: pay on time, pay in full. Also, signing up for multiple credit cards all at once makes you look risky to lenders, so try to contain the urge to sign up for that store credit because of the one-time 10% discount. It’s not worth it in the end. Finally, don’t max out the credit cards you do have. This will also reduce your credit trustworthiness.
Negative actions remain on your credit report for seven years. So the time you bought that cardboard cut-out of Elvis Presley instead of paying your credit card balance last June will stay with you for years to come. Serious offenses, such as bankruptcy, stay on the report for 10 years. These offenses can critically drop your score, raising your interest rates and making it harder to qualify for loans.
Now that you’ve heard the worst of the news, there are ways to build and maintain good credit. As it stands, creditors look at no credit as risky; it’s almost the same as bad credit. It’s important to build credit as soon as you can so your credit history can get a head start. Right now those student loans may look daunting, but they can be a blessing in disguise. “Education debt is good debt,” says Jeff Bentley, Regional Account Executive for American Student Assistance. Student loans help you build credit if you keep up your monthly installments. Also, they generally have a lower interest rate than credit cards. If you’ve charged those Visas with nights spent barhopping and shopping binges, keep up with the minimum payments on your loans, but make sure to pay off that credit card first.
Contrary to what your parents told you when you were in undergrad, it’s ok, even great, to have a few credit cards. Bentley says that students tend to ruin credit when they are presented with flashy offers of free t-shirts and giveaways. Not knowing the ramifications of their spending habits, student think, “I don’t have to pay that back.” But, as Bentley points out, “Credit cards are not bad if the are managed correctly.” Just keep your balance on the card to less than 20% of the available credit. Make small purchases on the card and pay it off each month. A good way to use a credit card is for gasoline. It’s no luxury, but you’ll be able to keep track of your monthly spending on gas and build your credit at the same time. It improves your credit score and keeps you out of trouble when it comes to debt.
When opening a credit card, make sure you use those expert shopping skills to find cards with low interest rates and small, if not no, monthly fees. Try to ignore the glitzy offers bombarding you in the mail and read the fine print. Make sure you know what you are getting yourself into before you sign on the dotted line. Many credit cards begin with no interest or annual fees, but then they skyrocket after a year or one missed payment. There are thousands of websites that offer tips on finding the right card, so do your research!
Finally, the best way to build your credit is to live by your mantra and pay those bills each and every month—nothing looks better on a credit report.
What if I already have bad credit?
Don’t panic. It’s not the end of the world. With the costs of college today, many students are graduating in debt, which can add up to negative points on the credit score. First things first, don’t ignore the final notices piling up in your mailbox. “Get in touch with your student loan company and talk to them about your options,” Palmer recommends. “Call them as soon as you know you’re going to have trouble making payments.” Also, talk to a nonprofit credit counselor. Bentley says it the best: “Don’t run away from it. There are people out there who are willing to help. Don’t hide away in your bunker. The further you dig yourself in, the harder it is to climb out.”
If you want to boost your score but can’t qualify for any major credit cards, try those store credit cards mentioned earlier. They are a bit easier to obtain, but they have a low limit, high interest, and you can only use them in very select locations, so be extra careful and responsible when using them. Also, make sure the one you choose reports to the credit bureaus. It defeats the purpose of opening the card if your good habits aren’t reflected on your credit report.
Finally, don’t let it get so bad that you have to resort to debt management, or even worse, bankruptcy. Even if you declare bankruptcy, your student loans are like embarrassing baby pictures: they never go away. “If they have to, student loans will be taken out of your social security check,” Bentley says. There are ways to avoid these extreme measures, such as debt consolidation, so do your research and talk to someone about your options.
A last bit of advice
Starting out in the world of loans and credit can be a big burden to handle, but as Bentley suggests, “Get the right information at the right time.” With some preventative education, you won’t have to deal with muscled debt collectors pounding on your door. Bentley also advises recent grads to know where their money is going by starting a budget. In doing so, grads can see where they can save money, or where they are spending needlessly.
Palmer also has a few suggestions. “Build an emergency fund. People don’t save money and end up relying on credit cards, and that’s where the problems begin.” She also points out that many students make a few moves after graduation during their deferment phase and neglect to leave a forwarding address. “The biggest majority of defaults happen on the first payment because students don’t receive their notifications,” she says. Make sure you keep your records up to date with your loan company.
Credit can be the bane of your existence, but it can be a blessing as well. Good credit can make it easier to qualify for a loan (for future big purchases such as houses, cars, grad school, or that pony you’ve always wanted), earn you lower rates on credit cards and auto insurance, and be beneficial in unexpected ways, such as improving the odds you’ll land that job in the CIA. So take the first steps in your newfound financial independence by obtaining a credit history and score. It won’t be as bad as you think.