The Recent Grad’s Guide to Building Credit

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Your credit score can impact almost important aspects of your life: The car you drive, the insurance rates you’ll pay and even the types of apartments you’ll qualify for.

This is why it’s important to start thinking about your credit as soon as you have that diploma in your hands (although it’s even better if you start thinking about it before).

Read on to learn about the steps you should take to build credit after you graduate.

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Analyze your credit report

First, it’s important to know where you stand when it comes to credit. And, in order to do that, you’ll need to get your credit report from all three credit bureaus: Experian, TransUnion and Equifax. (You can get copies for free from annualcreditreport.com on a weekly basis.)

Even if you don’t have much credit history, it’s important to check your report so you can catch any red flags that might indicate identity theft, such as accounts you don’t recognize.

If you do have some credit history — you have student loans or have a student credit card, for example — then it’s doubly important to check.

Note, however, that If your credit history consists of student loans, then you might want to wait until your grace period ends and payment is required in your loans. This is when student loans will start reporting your account to the credit bureaus.

Make payments on time

Payment history is the most important factor when it comes to your credit score, making up 35% of your FICO score and 40% of your VantageScore, the two main scoring models.

Once payment is required on your student loans, it’s essential you make your payments on time. Choose a convenient repayment plan and, as soon as you have consistent income, put your loans on auto-pay.

This will benefit you in a couple of ways: first, you won’t miss a payment and second, many lenders will grant you an auto-pay discount and reduce your interest rate. Even if it’s just a slight reduction, it could still help you pay them off faster and save money in the long run.

Apply for a secured credit card

You will need an excellent credit score to qualify for most of the best credit cards; however, there are cards meant for people with limited or no credit history at all. Many of these are secured cards, that is, cards that require a security deposit up front. This security deposit will typically serve as your credit limit and will be used to pay off your debt if you were to fail to make payments.

Getting a credit card can boost your score due to a few reasons: it’ll increase your available credit, it will help diversify your credit mix (if you only have installment loans like student loans) and it’ll give you a chance to build a history of on-time payments. These are all factors that impact your score; if you’d like to know more about these, make sure to read our article How are credit scores calculated.

Consider a credit-builder loan

If you don’t have student loans and have little credit history, you could consider getting a credit-builder loan — small loans that can help you establish a payment history as the lenders report your payments to the three credit bureaus.

They work differently from a regular loan, however. For one, you will not get funds up front; instead, the lender will deposit the amount of the loan in a savings account. You’ll make payments every month and, once you pay it off, you’ll receive the funds.

Note that a credit-builder loan is a type of installment loan, just like student loans. This means that, if you already have student loans, then a secured card might be more helpful for your score because it’ll improve your credit mix.

Limit new credit applications

While it’s important to diversify your credit and ensure you have a history of on-time payments, it’s also wise to be strategic when applying for new credit. Credit applications are recorded in your credit history and do slightly lower your score, so too many inquiries within a short span of time could take its toll.

Before you apply for a credit card or loan, read the requirements carefully to make sure you have a solid chance of approval.

Monitor your credit regularly

Once you have some credit to your name, it’s important to keep track of your credit report.

This is important for two reasons: one, you want to keep track of your progress, and two, you want to catch any potential flags of identity theft early, before it damages your credit.

You could do this by getting your report every week from annualcreditreport.com. Note, however, that these free reports don’t include your credit score. If you want to track your score, you could do it two ways:

• Check if your bank or credit card lender provides credit report monitoring services
• Consider a credit monitoring service

When you enroll in a credit monitoring service, whether it’s a dedicated service or your bank, you’ll receive alerts whenever there are changes to your credit and some will even scour the dark web to check if your personal information and/or passwords have been compromised.

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The Recent Grad’s Guide to Building Credit FAQs

Do student loans affect credit scores?

Student loans do affect your credit score but, if you pay them on time, they can actually help improve it. In order to have a great credit score, you need to demonstrate you can handle different types of credit accounts, including installment loans such as student loans and mortgages. And, if you got a student loan early in life, it can also help your credit age — that is, the average age of your accounts — which is yet another factor that can boost your score. On the other hand, if you’re not able to make payments on your student loans on time, it’s important to take action immediately by applying for a forbearance or some other type of payment plan. Failing to pay your loans can be hugely damaging to your credit, since late payments can knock off more than a 100 points from your score.

Does student loan deferment affect credit scores?

Which is the best way for a college student to start building their credit score?