One of the biggest challenges you will face following college graduation is building your credit history to achieve a good credit score. Your credit score and history are like your financial resume. They can help you land a job, lease an apartment, decrease auto insurance premiums, purchase a house, and more. They can also keep you from doing these things.
You likely know that building good credit is important – but you may have no clue how to do it. Fortunately, there are simple steps you can take to achieve a great credit score.
How to Go From Having No Credit to Great Credit
1. Land a Job
To get approved for credit cards, loans, and other types of credit accounts, you have to prove that you have the income to make repayments. However, landing a job in today’s market can be more difficult than you may first realize. Some employers run full criminal and credit background checks on prospective employees, and as a recent graduate who doesn’t have much of or any credit history, this can be an obstacle.
Going forward, keep in mind that the credit history you build can affect future employment opportunities. If you are looking to climb the corporate ladder or pursue a career that entails financial responsibilities, a good credit score is practically required to get you there.
2. Apply for a Secured Credit Card
Though it can be difficult when you are straight out of college, obtaining and using credit cards is part of the process of building credit. If you are having a hard time obtaining a credit card, then you can apply for a secured credit card. A secured credit card works just like a regular credit card, except that you place a security deposit with the credit card issuer to obtain it.
The security deposit tends to range from $300 to $500, depending on the credit card issuer and the current state of your credit. If you have negative items on your credit, the issuer can ask for a higher deposit to issue the secured credit card. If you don’t have any negative items on your credit, but simply do not have much of a credit history, then the credit card issuer may ask for a lower deposit amount.
A secured credit card is not a debit card, and it is not associated with your bank account. You receive a monthly bill and are required to make at least the minimum payment on the card. The payments are not deducted from the security deposit you make with the issuer. Rather, the security deposit is taken in case you default on your payments.
The purpose of establishing a secured credit card is that the card issuer reports the account to the credit bureaus. When you use the card and always make your payments on time, you can build a positive credit history that can help you establish new and additional types of credit in the future.
3. Always Pay Off Your Entire Balance
Responsible use of any credit card or credit account is another factor that goes into calculating your credit score. The best action to take is to pay off your credit card balance in full each month. The issuer only requires you to make a minimum monthly payment; however, if you only pay the minimum, you will continue to carry a balance and incur interest charges. Over time, carrying a credit card balance can hurt your credit score. If you do have to carry a balance (due to an emergency or other unforeseen expense), keep it for as short a time period as possible.
4. Always Make Payments on Time
According to FICO, 35% of your credit score calculation consists of your payment history. This means that it is imperative that you always pay your bills on or before the due date, and never miss making a payment.
Not only do late payments reflect negatively on your credit, they can create negative marks that negate all of the steps you’ve taken to build a positive credit history. To ensure that you always pay on time, write due dates in your calendar, have your creditors send bill payment due alerts, or, better yet, automate your payments.
5. Automate Your Payments
A great way to create a hassle-free payment plan is to set up automatic bill payments. Generally, there are two ways to do this: You can allow the debtor to automatically deduct the payment from your checking or savings account, or you can establish automatic payments with your bank that releases payment upon receipt of an electronic bill notification.
If you prefer to not attach your bank account to your debtor accounts, you may want to consider setting up automatic payments via a credit card. So long as you are able to pay off your credit card bill in full each month, you can build credit by not only paying your monthly bills on time, but by also displaying responsible credit card usage.
Keep in mind that you should always monitor your bill payments. Review your bank statements or credit card statements each month to ensure accuracy.
6. Apply for an Unsecured Credit Card
After one year of using a secured credit card, you can apply for an unsecured credit card. By this point, if you have been using your credit card wisely and paying all of your bills on time, you have had the opportunity to build a positive credit history.
If you use a bank that issues credit cards, your existing banking relationship can help you receive approval. However, it is important to shop around and compare cards until you find one that suits you best. Consider interest rates, credit card reward programs, and possible credit limits. When you choose a card you think best fits your needs and wants, complete and submit the application.
When you receive an unsecured credit card, remain disciplined in your usage. Charge only what you can afford to pay off each month, and always pay on or before the due date.
7. Avoid Applying for Too Many New Credit Accounts and Loans
While applying for new credit accounts and loans is important to build solid credit, it is also important to spread out establishing these accounts over time, rather than taking on too much at once.
For example, if you receive an unsecured credit card, use it for six months or so prior to applying for another credit card, a car loan, furniture store credit account, or other type of account. This is important because each time a lender pulls your credit, it lowers your score. The only exception to this rule is if you are applying for the same type of loan via multiple sources. For example, if you are financing the purchase of a new car, you can shop and compare the interest rate and type of loan with three or more different lenders. If you apply for these loans within a time-frame of approximately 30 days, all of the credit inquiries only count as one inquiry.
8. Increase Your Credit Limit
Instead of applying for a new credit card to increase your credit limit, simply apply for a credit limit increase with the cards you already have. After the issuer reviews your account, it will judge whether you are eligible. 30% of your credit score is based on the percentage of your available balance that you use. So if your credit limit is high and your use of the line is low, this can help to boost your credit score. In other words, it’s a good idea to apply for a credit limit increase long before you actually need to use it.
Credit seems to make the world go ’round, and if you don’t have a sufficient credit history, you may be unable to make major purchases or even land a great job. To avoid this, make financial responsibility a priority, and follow these handful of steps to help build a healthy credit score in no time.
What else can you do to improve your credit rating?