The path to good credit after college

Follow these four lessons on building a solid credit profile after you graduate

By Erica Sandberg

Opening Credits

Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com. Ask a question. 'Opening Credits' stories

Dear Opening Credits,
I do not have a credit card because I just graduated from college. I owe on student loans that I need to repay, but in the meantime I would like to get a credit card of my own and want to get a credit history so I can get a card. What do you think I should do? Would a prepaid card help me? Thanks for your thoughts. -- Vanessa

Session one: Get a credit card, not a prepaid card. The former will allow you to borrow money from a credit issuer, up to a set limit. A prepaid card is nothing more than a vessel that you load up with your own cash. No actual borrowing is involved, so your activity will not appear on a credit report. As you're just starting out, you'll probably need to get a secured, rather than an unsecured, credit card. Qualification is generally not too tough because you put a cash deposit down as collateral.

Session two: Understand the credit reporting process. Each time you apply for and open a credit account and then use it to make purchases, the company will notify the three major credit reporting bureaus (TransUnion, Equifax, and Experian) of your activity. Loans will also show up, which means your student loan is already being listed. It's your right and responsibility to keep an eye on your credit reports. Can check them for free once a year at AnnualCreditReport.com.

Session three: Know what credit scoring is. A company called FICO accesses the information on a credit report. They plug it into a formula, which generates a numerical score that lenders and other companies may use to make business decisions. Scores range from 300 to 850, and the higher your score, the better rates and terms lenders will likely offer you. The weightiest factor in a FICO score is payment history, followed quickly by the amount of debt you have in relation to the amount you can borrow. Types of credit in use, length of time you've had and used credit, and the number of times you've applied for credit are more minor considerations, but still important.

Session four: Charge responsibly! Use a credit card to your benefit, not your detriment, as so many do. To avoid leaning on your card when funds are tight, develop a budget that you can stick to. Then charge a couple of small purchases once a week or so. Set a personal debt ceiling, such as never owing more than $100 on the card for the month. Pay the entire bill the moment it comes in. As for those student loans, make sure you start paying them when you should. Apply for deferments and forbearances if you're unable to meet the payments. Whatever you do, don't let them default.

Got all that? Sure you do. It's really an easy "A" course. At least on paper it is...

Unfortunately, it's also pretty easy to forget the basics and use credit to your disadvantage. Do that and you'll rack up big balances and have to come up with high monthly payments that will throw your budget way off track. Interest and other fees will be added to what you owe, which will only worsen the problem. And if you really mess up -- by skipping a payment or allowing accounts to go into collections -- your credit reports and scores will suffer, making it harder to get good credit cards, inexpensive loans (like for a car) and even rent an apartment.

It's been wonderful having you as a student Vanessa -- now get out there and charge brilliantly!

See related: FICO's 5 factors: The components of a FICO credit score, How to face a student loan debt disaster, Unhappy with student loan terms? Consider these options

Erica Sandberg's articles and insight are featured in such publications as the Wall Street Journal, Pregnancy, Babytalk, Redbook, Bank Investment Consultant, Prosper.com, MSNMoney.com, and Smartmoney.com. An active television and radio commentator, Erica is the credit and money management expert for San Francisco’s KRON-TV, a frequent guest on Forbes Video Network, Fox Business News, Businessweek-TV, and all Bay Area networks. Prior to launching her own reporting and consulting business, she was affiliated with Consumer Credit Counseling Services of San Francisco where she counseled individuals, conducted educational workshops, and led the media relations department. Erica is a member of the Society of American Business Editors and Writers, and on the advisory committee for Project Money.

Send your question to Erica.

Published: July 13, 2011

	Three most recent Opening Credits stories: 2 ways to start building a credit history – You want your first credit card, but no bank will give you one without an established credit history. How do you go about proving you're a good credit risk? ... When it's OK to get a second credit card – You've been faithful to paying on time with your first credit card, but the limit is low. How do you know when it's a good time to get a second credit card? ... Know where you stand before you apply for new credit – To know what kind of credit card you can qualify for, you first need to know your credit score and pull your credit reports ...

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